If suppliers were to offer African companies payment terms of 30 days after delivery of goods and services, rather than demand payment in cash in advance, this could release more than $33.5 billion of additional working capital to be put to more productive use in 2018, according to Euler Hermes.
In 2015, Euler Hermes estimated that if a payment term of 30 days were to be granted on the share of imports paid in cash (cash in advance), then it would free up over USD 40bn of working capital for African companies.
Since then, the trade picture has changed; a commodity shock hit resource-rich African countries and slashed their exports revenues, reducing further their capacity to finance imports even further. This contributed to the 22% fall in African import values from $800 billion in 2014 to $623 billion in 2016.
“Taking into account the new trade picture, our estimate stands at USD 33.5bn of working capital freed up for African companies in 2018. Lower imports combined with lower payment terms, 64% of imports are paid in advance, explains this result,” said Ludovic Subran, Euler Hermes Chief Economist.
Euler Hermes expects imports to grow at a +8% annual rate in this region. Should suppliers lengthen their payment term by 30 days, this would free about $45 billion by 2020. The parallel development of trade finance is key to seize this great opportunity for the African continent.
“Big players are often bad payers, when small players have no opportunity to pay late. It is especially true in Africa: there is a paradox when we see that key State Owned Enterprises are able to postpone their payments by several years, for example in Angola or in the past in Egypt, while others have no other choice than cash payment. As an example, Moroccan main corporates have 84 days of DSO but 30% of the transactions (those involving smaller ones) are still paid in cash,” said Stéphane Colliac, Euler Hermes Senior Economist for Africa.