African Trade Finance report highlights impact of Covid-19

• According to the report, the number of correspondent banking relationships fell across the region, and the rejection of L/C requests increased.
  

April 21, 2021: On April 15, African Export-Import Bank (Afreximbank), in collaboration with the United Nations Economic Commission for Africa (ECA), the African Development Bank (AfDB) and Making Finance Work for Africa Partnership (MFW4A) released the African Trade Finance Survey Report which provides a better understanding of the trade finance landscape across Africa and how it has evolved during the Covid-19 pandemic. The report is the first of its kind, surveying 185 banks from across Africa, representing more than 58 percent of total assets held by African banks.

In his opening remarks, professor Benedict Oramah, president of Afreximbank, highlighted how the tightening global financial conditions triggered massive capital outflows from Africa, exceeding $5 billion in the first quarter of 2020. “These massive capital outflows strained African banks, many of which recorded sharp drops in their net foreign assets. This further exacerbated liquidity constraints and undermined the capacity of banks to finance African trade,” said Oramah.

As a result of the pandemic and inherent tightening financing conditions, heightening balance of payment pressures and liquidity constraints, the supply of trade finance was affected between January and April 2020, the period covered by the survey. According to the report, the number of correspondent banking relationships fell across the region, and the rejection of L/C requests increased, with about 38 percent of local/privately-owned banks and 30 percent of foreign banks reporting an increase in rejection rates, respectively.

Vera Songwe, executive secretary at the 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 $2 billion facility to help African member states purchase up to 400 million doses of the Covid-19 vaccines,” she added.

Songwe also 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 as such banks can leverage this capital five or six times and deploy more resources towards Africa’s recovery.

The report highlighted the role trade finance can play in overcoming the social and economic fallout of the Covid-19 pandemic to quicken the process of economic recovery through trade and investment growth.

For Ebson Uanguta, deputy governor of Bank of Namibia, the crisis 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 $619 million,” said Uanguta.

According to Mervat Soltan, chairperson and managing director at the Export Development Bank of Egypt, the bank had seen a big uptake in its digital services during the pandemic 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,” she added.

The report pointed out that African trade amounts to $1,077 billion but that banks intermediate $417 billion of this, approximately 40 percent, whilst the global average is 80%. Ms Bola Adesola, Senior Vice Chairman for Africa at Standard Chartered stressed the need to increase businesses on the continent, to help drive trade both extra- and intra-African trade and banks’ intermediation. The African Continental Free Trade Agreement (AfCFTA), she added, can provide a platform to help drive greater businesses.

The report made numerous recommendations. These include: a greater engagement between central banks and industry; push for increased digitalisation and take up of technologies; and better data, which will help better understand and price risk.

In his closing remarks, Hippolyte Fofack, chief economist at Afreximbank, reiterated the need to sustainably grow the supply of trade finance across the region. “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,” he added.