Regarding correspondent banking relationships, major international banks and financiers cancelled and/or reduced their lines of credit limits for African banks, with Europe accounting for about 50 percent of the development.
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,” Oramah said.
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 percent.
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 said, can provide a platform to help drive greater businesses.
Africa suffered its first recession in more than 25 years, and African trade contracted by 11.9 percent in 2020. Between January and August 2020, Africa’s merchandise trade contracted by 12 percent compared with the same period the previous year. Although the contraction was synchronised across the whole region, the greatest impact was on economies dependent on tourism and commodities, and especially leading oil-producing countries where oil exports account for more than 90 percent of foreign exchange earnings and more than 60 percent of fiscal revenues.
A joint survey undertaken by the African Development Bank (AfDB) and the Afreximbank covering the 10-year period 2011-2019, titled “Trade finance in Africa: Trends over the past decade and opportunities ahead”, was published in September 2020.
The report revealed that Africa’s trade financing gap decreased steadily from US$120 billion in 2011 to US$70 billion at the end of 2016, with the downward trend reversing in 2019, when the continent’s trade financing gap increased to an estimated US$81.80 billion; while average unmet trade financing demand in Africa was estimated at US$82.5 billion (which represents 5.5 percent of the global trade financing gap during the 10-year period).
The average size of bank-intermediated trade financing in Africa was estimated at US$417 billion, even though total African trade averaged US$1.077 trillion during the same period. This suggests that banks intermediated only 40 percent of Africa’s trade compared with 80 percent of world trade—which indicates that African trade is significantly underserved.
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 said.