Regional Trade Facilitation Project - Malawi

The Regional Trade Facilitation Projects (RTFP) principal objective is to contribute to poverty alleviation through private sector led growth in participating countries by improving access to financing for productive transactions and cross-border trade.The Common Market fo r Southern and Eastern Africa (COMESA) initiated the RTFP as an important complement to its regional integrat ion activities, in particular the introduction of a free trade area on October 31, 2000. The project will in itially cover seven countries (Burundi, Kenya, Malawi, Rwanda, Tanzania, Uganda, and Zambia), and can be exte nded to cover all African countries, in order to broaden the development impact of the project as much as possible.Financing for productive activities in Africa is presently severely constrained by a perception of high risk in the region as a whole, and in individual c ountries in the region. Interviews with market players indicate that a significant element of this perceptio n is associated with risks caused by government behavior and political events, such as war and civil commotio n. In many countries, however, this perception is not justified by current circumstances. The same is true for the perception that Africa as a region would be inherently more risky than other regions or continents.There are significant gaps in the private political risk insurance market when it comes to the assumption of political risk in cross-border transactions involvin g African countries, which hinders growth of productive activity in Africa. Political risk cover from commer cial sources or export credit agencies is not available at all for some African countries, and where cover is available it is usually very costly and on unfavorable terms. In particular, available cover is either very thin or non-existent for transactions over the medium term thereby restricting the import of essential capital goods into African countries.The project aims to address this problem by bringing together a group of countries that are willing to address the markets perce ption by setting up a credible insurance mechanism against losses caused by political risks. The governments of these countries would agree to be the ultimate risk takers in the insurance mechanism, thus creating a st rong disincentive to cause claims. This type of insurance is currently not available from the private market, particularly for medium-term transactions (over one year).As a result of the public sector addressing political risk through the RTFP, the private insurance sector will have the ability to extend its activities in the region. International export credit insurers, in cooperation with local financial institutions, will use the political risk insurance facility to offer commercial risk insurance, w hich will result in comprehensive export credit coverage being available to the private sector in Africa.The project will thus widen the scope for private secto r activity, in particular by extending the maturities at which credit is available, creating a more stable bu siness environment by ensuring the availability of coverage on a consistent and predictable basis, and, by im proving the risk, lowering the risk premium. Participating countries will reap earlier and more substantive b enefits from improved policies, as the private sector will increase its activity without having to wait for a long track record of policy and political stability.