African Export-Import Bank, the UN Economic Commission for Africa, the African Development Bank and Making Finance Work for Africa Partnership have released a special African Trade Finance Survey Report assessing the impact of the COVID-19 pandemic on trade finance in Africa.
The first of a kind report surveys 185 banks across Africa, representing almost 60% of total assets held by African banks.
Professor Benedict Orama, Afreximbank president, explained that tightening global financing conditions triggered massive capital outflows from Africa, exceeding $5billion the first quarter of 2020. “These massive capital outflows strained Africa banks, many of which recorded sharp drops in net foreign assets. This further exacerbated liquidity constraints and undermined the capacity of banks to finance African trade.”
The pandemic induced a tightening of financing conditions, which heightened balance of payment pressures and liquidity constrains, affecting supply of trade finance between January and April 2020, the period covered by the survey.
The report states the number of correspondent banking relationships feel across the region and the rejection of letters of credit requests increased. About 38%of indigenous privately-owned banks and 30% of foreign-owned banks reported an increase in reject rates for this time period.
Dr Vera Songwe, executive secretary at the UN Economic Commission for Africa (ECA) commended Afreximbank for the counter-cyclical measures it took to help countries deal with the economic and health impacts of the COVID-19 pandemic: “The bank has also played a major role in putting together a $2billion facility to help African member states purchase up to 400 million doses of the COVID-19 vaccine.”
Free trade in Africa could help accelerate economic recovery post-COVID-19
Songwe urged African leaders, especially central bank governors and ministers of finance and other development partners to further support institutions such as Afreximbank through capital increases. This is because such banks can leverage this capital five or six times and thus deploy more resources towards Africa’s post-COVID-19 recovery.
The report highlighted the role trade finance can play in overcoming social and economic impacts of the COVID-19 pandemic to accelerate the process of economic recovery through trade and investment growth.
Ebson Uanguta, deputy governor of Bank of Namibia, said the crises was deep and government interventions needed to be bold and swift to help banks support businesses and limit insolvencies: “Most sectors of the economies were severely impacted and we took several measures to support the broader economy and trade finance in particular, including easing of monetary policy, relaxation of regulatory requirements and institution of loan repayment moratoriums to the tune of $619million.”
Expanded digitalisation has surprising result
Mervat Soltan, chairperson and managing director of the Export Development Bank of Egypt, said they had seen a big uptake of its digital services during the pandemic. Egypt is one of the few countries where output expanded in the face of a synchronised global downturn.
“Digitalisation which sustained business and trade growth during the pandemic offers a great opportunity to help reduce costs and increase the use of trade finance facilities and should become an integral part of the strategy to boost African trade post-COVID-19,” said Soltan.
The report stated that free trade in Africa durning the survey period amounted to $1,077billion, but banks intermediated $417billion of this, approximately 40%, compared to the global average of 80%.
Bola Adesola, senior vice chairperson for Africa at Standard Chartered, stressed the need to increase businesses on the continent, to help drive extra and intra-Africa trade and banks’ intermediation. She believes the African Continental Free Trade Agreement could provide a platform to help drive more businesses.
Amer Kamel, Afreximbank executive vice president of business development and corporate banking highlighted the role of Development Finance Institutions (DFIs) during economic downturns: “Afreximbank’s Pandemic Trade Impact Mitigation Facility has provided timely support to banks, helping clear trade debt payments falling due and avert payment defaults.”
Greater engagement, collaboration and sharing of data is called for
Kamel shared some of the initiatives the Bank was pushing through to address the challenge of liquidity constrains and to boost trade finance in Africa. These include the Pan-African Payments and Settlements System to reduce foreign currency content of African trade and THE Afreximbank Trade Finance and Trade Facilitation programme to increase the provision of correspondent banking services to African banks.
Eng. Hani Salem Sonbol, CEO of the International Islamic Trade Finance Corporation reiterated the importance of international collaboration, even when the initial instinct in a crises is to look inwards. Their response to the pandemic has been anchored on three Rs – assist to help Respond to the pandemic, help with the Recovery and contribute to Restart the economy.
The report suggests numerous recommendations, including: a greater engagement between central banks and industry; push for increased digitalisation and take up of technologies; and better data.
Dr Hippolyte Fofack, Afreximbank chief economist, reiterated the need to sustainably grow the supply of trade finance across the continent: “Trade finance is the lifeblood of commerce and will play a key role in the recovery and structural transformation of African economies to better prepare the region to future global crises.”
The African Trade Finance Survey is available online.