Global DFIs canvass trade continuity in sub-Saharan Africa to avoid second wave insolvency crisis

Ben Eguzozie, with wire report

As fears heightens over a ‘second wave insolvency crisis’ from the Covid-19 pandemic, and the greater fear of its massive socio-economic hit on countries of sub-Saharan Africa, a consortium of multilateral development banks (MDBs) and trade research institutions have mounted calls for measures to support trade continuity in the region.

With 1.3 billion people and a combined gross domestic product (GDP) of $3 trillion, the IMF said sub-Saharan Africa stands a great risk of extreme poverty and starvation should there be a second wave of Covid-19.

Bankers interviewed for the Trade Finance ‘Pulse Check,’ unanimously called for an urgent switch in the focus of support towards SSA’s private sector and smaller enterprises to avoid an insolvency crisis, while recounting the views of the SSA banks on multilateral development banks’ responses to uphold a well-functioning trade finance market.

The report, which brought together the perspectives and insights from 70 trade finance executives from 20 countries, said there was urgent need for switch in the focus of support programmes towards the continent’s private sector and smaller enterprises to avoid a ‘second wave insolvency crisis’ that threatens greater, and far more widespread economic hardship on the continent than we have seen till now.

According to the interviewees, demand for trade finance instruments in the first half of 2020 seems to have flattened compared to growth expectations, while banks supplying those instruments have typically “flown to safety” restricting their lending to existing clients. Overall, the market has contracted from at least 10 per cent on average from 2019 levels in volume, and even greater in value because of furloughed projects and investments. Full recovery is only anticipated by end of 2021 at the earliest.

Banks interviewed mentioned that their main constraints revolved around risk uncertainties / macroprudential limitations to extend credit outside of their comfort zone, especially during a persisting pandemic.

The Pulse Check report made several priority recommendations for MDBs such as: a switch in focus to private sector support, increasing availability of risk-sharing instruments as well as a more granular funding offering. The need to emphasise pooling of efforts and resources across MDBs and development finance institutions (DFIs) operating in Africa to respond more effectively to the unfolding situation.

Contributing organisations include the African Development Bank (AfDB), the Arab Bank for Economic Development in Africa (BADEA), the Banque Ouest-Africaine de Développement (BOAD), the East African Development Bank (EADB), the International Chamber of Commerce (ICC), the International Trade Center (ITC), the International Islamic Trade Finance Corporation (ITFC), and the Trade & Development Bank (TDB).