The European Business Council for Africa

At a time when significant progress is being made in understanding the dynamics of the coronavirus and in mitigating the pandemic’s downside risks, we can easily become complacent and overlook the worsening of challenges to global trade and economic growth. One of the most important issues that deserve attention is trade finance, a market that has proven especially vulnerable to economic and financial shocks.

The supply of trade fi nance, which supports more than 80% of global trade fl ows annually, has been one of the key constraints to the growth of African trade. Although it has proven to be a low-risk asset class, trade fi nance’s short-term and transactional nature has emerged as an important risk multiplier, with business cycle ‘credit crunches’ adversely aff ecting import and exports.

These risks were magnifi ed by the COVID-19-induced downturn, which heightened global volatility and exacerbated risk perception in the face of increasing balance of payments pressures and widening trade defi cits. Sharp falls in the economic activity triggered by lockdowns and border closures were accompanied by dramatic increases in health expenditures. Tighter global fi nancing conditions triggered massive capital outfl ows from Africa and resulted in a sharp widening of interest rate spreads, while temporarily shutting out sub-investment grade borrowers from international capital markets.

The pandemic may be brought under control, but it is already clear that the consequences of this crisis for African trade fi nance will be signifi cant and lasting. In the short term, the limited supply of trade fi nance could inhibit the potential for trade to act as a vector of economic recovery in a region where trade fi nancing gaps were already sizeable. These gaps have been magnifi ed by the withdrawal of major international banks from the African trade fi nance landscape, owing to increased compliance and regulatory costs. Similarly noteworthy are the risks associated with commodity price cycles, as the exit of major banks from the commodities trade fi nance market in the third quarter of 2020 illustrated.

This report – the product of a collaboration between the African Export-Import Bank (Afreximbank), the Making Finance Work for Africa Partnership (MFW4A), hosted by the African Development Bank and the United Nations Economic Commission for Africa (UNECA) – off ers a ground-breaking, fi rstever assessment of the potential impact of the COVID-19 pandemic on trade fi nance activities of commercial banks across Africa. Drawing on primary data collected from banks and fi nancial institutions accounting for about 58% of total Africa banking assets across all subregions of the continent, the report covers not only the degree to which the pandemic undermined the supply of trade fi nance, but also the extent to which geography and ownership structures of banks aff ected access to trade financing.