Tightening global financial conditions triggered over $5bn capital outflows from Africa in the first quarter of 2020 – Afreximbank

• Report by the bank highlights how trade finance will play a key role in transforming the African economy as lifeblood of commerce

Charles Abuede

A trade finance survey by the 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) has revealed that 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, resulting in massive capital outflows from Africa, exceeding $5 billion.

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 is the first of its kind, surveying 185 banks from across Africa and representing more than 58 per cent of total assets held by African banks. According to the report, the number of correspondent banking relationships fell across the region and the rejection of letter of credit (L/C) requests increased, with about 38 per cent of local or privately-owned banks and 30 per cent of foreign banks reporting an increase in rejection rates, respectively.

Professor Benedict Oramah, President of Afreximbank, in his opening remarks, 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 the liquidity constraints and undermined the capacity of banks to finance African trade.”

Also commenting, Dr 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 and 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 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.

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. She further added that the African Continental Free Trade Agreement (AfCFTA) can provide a platform to help drive greater businesses as she pointed in the report that African trade amounts to $1,077 billion but that banks intermediate $417 billion of this, approximately 40 per cent, whilst the global average is 80 per cent.

For Ebson Uanguta, Deputy Governor of Bank of Namibia, stated that 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.”

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. Egypt is one of the few countries where output expanded in the face of a synchronized 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.”

Elsewhere, Amr Kamel, Executive Vice President, Business Development and Corporate Banking at Afreximbank, highlighted the role of Development Finance Institutions during downturns, pointing out that “Afreximbank’s Pandemic Trade Impact Mitigation Facility (PATIMFA) has provided timely support to banks, helping to clear payments falling due and avert payment defaults.” He also shared some of the key initiatives the Bank is pushing through to address the challenges of liquidity constraints and boost African trade such as the Pan-African Payment and Settlement System (PAPSS) to reduce the foreign currency content of African trade and Afreximbank Trade Finance and Trade Facilitation (AFTRAF) programme to increase the provision of correspondent banking services to African banks.

Meanwhile, Eng. Hani Salem Sonbol, CEO of the International Islamic Trade Finance Corporation (ITFC), and one of the Bank’s longstanding partners, reiterated the importance of international collaboration even if the initial instinct in a crisis is to look inwards. Their response in Africa to the crisis has been anchored on three Rs: assist to help Respond to the pandemic; help with the Recovery; and contribute to Restart the economy.

The survey which was collaboratively carried out on 185 banks recommended that there should be a greater engagement between central banks and industry; the push for increased digitalisation and take-up of technologies, and better data, which will help better understand and price risk.

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