Trade finance and efforts to boost intra-African trade
By Lodewyk Meyer and Lucy Stratton
AAs the President of the African Development Bank (AfDB), Akinwumi A. Adesina, has stated, “Trade finance is an important instrument for influencing Africa’s long-term economic development and structural transformation”.
According to a report by the AfBB and the African Export-Import Bank (Afrexim), Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead, the region was one of the most integrated with the rest of the world in 2011 , Africa’s trade growth over the past decade has been one of the worst among major regions in the world. This is due to a number of factors, including falling commodity prices, competition, insufficient foreign exchange liquidity, regulatory challenges and access to trade finance, as banks have gradually reduced their activities. in riskier markets.
The study showed that although trade finance remains a popular activity among banks in Africa, participation rates continue to decline, falling by 16% between 2013 and 2019. As a result, the trade finance gap in Africa averaged USD 91 billion for the period between 2011 to 2019. In addition, trade uncertainty in Africa has been exacerbated by the impact of the COVID-19 pandemic, which has resulted in a double shock of the supply and demand across the continent. Supply has been affected by mass production shutdowns and supply chain blockages and demand for products from Africa has declined globally.
Despite the persistent large trade finance gap, trade remains a key driver of Africa’s social and economic development. As a result, banks such as the AfDB and Afrexim have sought to monitor market developments and come up with solutions to boost intra-African trade.
On January 1, 2021, significant progress was made with the start of free trade under the African Continental Free Trade Area (AfCFTA) for African countries that had ratified the AfCFTA agreement and submitted their tariff offers, an initiative in progress since 2012.
According to research by Baker McKenzie with Oxford Economics – AfCFTA’s $3 Trillion Opportunity – there are now unprecedented opportunities for Africa and its trading partners to reap economic benefits through possible improvements in transport infrastructure, reduction of bureaucracy for cross-border transactions, renewed financing and improved cash.
If successful, the AfCFTA will provide opportunities for African countries to diversify their economies, increase their productive capacity and expand the range of products made in Africa, particularly by boosting the production of manufactured goods (and possibility for multinational companies to establish manufacturing plants in Africa). the continent). Closer integration of neighboring economies is a potential route to creating scale and competitiveness through the enlargement of the internal market, thereby promoting development and stimulating foreign investment through greater efficiency.
In addition to the AfCFTA, the AfDB has been at the forefront of finding solutions to bridge the trade finance gap through its “High 5” strategic priorities to: (1) Power and Light Africa , (2) feed Africa, (3) industrialize Africa, (4) integrate Africa, and (5) improve the quality of life of Africans.
In July 2021, the AfDB, through its Trade Finance Operations for Financial Sector Development, launched the Transaction Guarantee Instrument as a means to increase trade finance on the continent. The AfDB recently noted that the new instrument would allow local financial institutions to establish relationships with international banks, thereby expanding their network of global trade finance partners. It would also improve access to finance for African small and medium enterprises, for example.
According to the AfDB, the instrument will provide regional and international banks with coverage of up to 100% of the risk of non-payment, for commercial transactions initiated by local banks in Africa. The guarantee will cover various trade finance instruments including confirmed letters of credit, trade loans, irrevocable repayment commitments, endorsed bills and promissory notes.
In a recent presentation given by the AfDB, it was noted that the transactional guarantee would help reduce the trade finance gap in Africa for the following reasons:
- This will help attract correspondent banks to the region and increase the leeway of African issuing banks
- It will support transactions for underserved groups and sub-regions with higher than usual rejection rates
- It will help local issuing banks that are struggling to compete due to lack of correspondent relationships, and provide opportunities for capacity building.
New efforts to increase intra-African trade received further impetus on February 9, 2022 when the AfCFTA and Afrexim signed an agreement to manage the AfCFTA Adjustment Fund Core Fund. It is reported that the Fund will help African countries and the private sector to participate effectively in the new business environment established under the AfCFTA.
The Funds consist of the following:
- Core Fund – made up of State Party contributions, grants and technical assistance funds to address tariff revenue losses as tariffs are phased out
- General fund – to mobilize concessional finance
- Credit Fund – to mobilize commercial finance to support the public and private sectors.
The Basic Fund was launched to meet the urgent needs of countries regarding tariff revenue losses and transposition costs to enable them to implement the AfCFTA agreement. The general and credit funds will be launched in the coming months to meet the needs of the private sector, including small and medium enterprises, women and young people, according to Professor Benedict Oramah (President and Chairman of the Board of Directors of Afrexim).
The Adjustment Fund follows on from the Pan African Payments and Settlement System (PAPSS), which was launched on January 13, 2022 in Accra, Ghana. PAPSS is a centralized payment and settlement system for intra-African trade payments. Wamkele Mene, Secretary General of the AfCFTA, said the PAPSS was essential in promoting intra-African trade as African countries would no longer need to use third-party currencies when trading with each other.
Since the inception of the AfCFTA, there have been significant developments for intra-African trade with the launch of the transaction guarantee instrument, the PAPSS and the AfCFTA Adjustment Fund Base Fund. As a result, Africa is slowly beginning to show signs of renewal. Increased investment, both in Africa and internationally, will ensure a continued narrowing of the trade finance gap and a steady boost to social and economic growth in Africa.
Lodewyk Meyer is Partner and Head of Banking and Finance Practice, and Lucy Stratton, Designated Partner at Baker McKenzie in Johannesburg
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