In a roundtable held virtually in July 2021, GTR and Crown Agents Bank gathered some of Africa’s most influential figures from across the trade and trade finance sector to discuss the continent’s journey towards an inclusive, cohesive and sustainable post-pandemic reality.
- Tedd George, chief narrative officer, Kleos Advisory UK
- Ian Henderson, chief investment officer, Artis Finance
- Shannon Manders, editorial director, GTR (moderator)
- Victor Mashoko, senior manager, structured trade and commodity finance, Southern Africa Region, African Export-Import Bank (Afreximbank)
- Bleming Nekati, chief trade finance officer, African Development Bank
- Duarte Pedreira, head of emerging and frontier markets, Crown Agents Bank (co-host)
- Makiko Toyoda, acting head at IFC, World Bank Group
- Emma Wade-Smith, trade commissioner for Africa, UK Department for International Trade
GTR: We know that African countries are yet to see the light at the end of the tunnel when it comes to the Covid-19 crisis. However, the United Nations is already urging African countries to initiate deep economic reforms and prepare for the future. What does Africa need to begin these reforms, and start reducing the financing and infrastructure gap?
Pedreira: What we’re presented with here is a perfect opportunity for a peaceful revolution. Africa has been plagued by the old trading models that externalised value creation, forced the exportation of unprocessed commodities and importation of value-added goods.
The tide has changed dramatically. Africa is turning to the internalisation of value-add, within the continent, and it’s realigning the continent’s ambitions with value-added industries and a huge focus on technology. The newly created and now operational African Continental Free Trade Area will be a big part of that.
I think the paradigm is shifting. It’s no longer about foreign entities coming into Africa to buy commodities, take them out and export them back to Africa as value-added goods. Now, it should be about production of value-added goods in Africa, for them to be distributed in Africa. It becomes a privilege to have access to this newly created trade area, which is second only to the WTO in terms of size.
We are now seeing the production of mobile phones in places like South Africa and Rwanda, and soon to be Nigeria – as well as computers, electricity meters, all powered by technology. I think infrastructure will then come on the back of this, because the retention of value in Africa will be able to generate this equity layer that then allows African sovereigns to reinvest effectively in logistics, making this intra-Africa trade and value creation a reality.
Nekati: The negative impact that Covid-19 has caused on the continent has been unprecedented, both in terms of nature and scale. One only needs to look at the severe strain on public finances. You look at fiscal deficits, all around us they are widening, and in terms of debt levels you are talking about 80% of GDP, which is quite unsustainable. Our figures at the African Development Bank, and those coming out of the IMF, are showing that Africa – and in particular Sub-Saharan Africa – is going to need up to US$425bn between now and the end of 2025. All hands need to be on deck.
The first thing we’ve done is put in place a US$10bn facility that we call the Covid-19 Rapid Response Facility. This is aimed at helping a number of countries that are constrained by the fiscal challenges that have emerged.
We have also, since around 2020, launched a US$3bn Covid-19 social bond. This was oversubscribed and was the largest US dollar-denominated bond of its kind that has ever been floated. This bond is listed on a number of stock exchanges including the London Stock Exchange, Nasdaq and the Luxembourg Stock Exchange.
Coming to the infrastructure gap, our estimates have always shown that Africa needs between US$70bn and US$110bn to cover that gap, but this is a job that needs many others to play a role. We’re doing a lot of work in deepening capital markets, providing technical assistance and support, so the continent can have the technical skills that are needed in this space. We also engage in public sector dialogue. It is only when capital markets are deeper that countries can raise the necessary funding to support investment requirements as well as infrastructure requirements.
We are also working with the African Investment Forum (AIF), which brings together many stakeholders, multidisciplinary in nature, and allows investors and those with projects to come together. Since the launch of the AIF, we have tabled 57 deals in total with a value of about US$68bn – from that, about 52 deals worth around US$40bn managed to secure investment.
Wade-Smith: It’s interesting to hear what the UN has said. It mirrors what many organisations and institutions have said, not just during Covid but pre-Covid: that we need to see economic reforms, an improved business environment, tackling market access barriers to enable more companies to grow, create jobs, and trade across national borders in Africa. So this isn’t new – but I think it has been exacerbated by the economic devastation Covid-19 has caused, which continues to play out in Africa.
We’ve seen stock exchanges, like the London Stock Exchange group, working with stock exchanges in Africa to try and build deeper resilience in African capital markets. The UK government has also supported the financial sector, deepening its Africa programme, all designed to enable Africa to create wealth itself. What is interesting about Covid is the way it has made us all think about building forward better, with a focus around sustainability, inclusion, resilience and greener growth.
How do you improve access to finance, or build sustainable infrastructure so that we’re not building stranded assets for the future? Technology can really play a part in that, and I think we’ve seen that accelerate over the last 12 to 18 months.
We’ve also seen money flows change direction. Over the past 18 months, and particularly in the first months of the pandemic, we saw money flowing out of Africa at really alarming rates. What we need to do to attract money back to Africa is to see more governments being more committed to making the reforms that will entice money back and provide the financing and investment that our economies need – not just in infrastructure, but across education, healthcare and agriculture. Africa’s economies need that international investment, and the best way to do it is to create exciting, dynamic economies by making reforms to some of the outdated regulations that are hampering the flow of business activity.
GTR: What role does trade and trade finance play in Africa’s economic recovery?
Toyoda: We know that every 1-percentage point increase in trade will produce a 2-percentage point increase in income per capita. Trade drives everything in economic recovery, and from IFC’s point of view, we think the private sector is key to promote this. Without trade, no production starts, no operations start. In many cases, trade will not happen without trade finance. This is the beginning of the recovery stage, and we all have to come together to support this trade activity.
Vaccine access is critical to start economic recovery, and we either have to import vaccines onto the continent or we need to import vaccine inputs in order to produce locally. In terms of that sequence of the economic recovery, trade will therefore start everything. IFC just launched the Africa Trade Recovery Support Initiative to support trade and supply chain especially for SMEs.
Mashoko: Trade finance has a big role to play on the continent. In particular keeping the trade of goods and services flowing presents not only an economic but also a social imperative to preserve livelihoods of millions on the continent. Pre-Covid, the trade finance gap in Africa was estimated to be about US$81bn, and the industry has a role in reducing that gap. Trade finance will also play a role in providing instruments for short-term working capital requirements, in sectors like health and medical supplies that have expanded dramatically following the onset of Covid.
This role is also played by development finance institutions (DFIs), which should continue to invest in the continent by supporting the provision of trade finance. Several rapid response programmes have been launched by DFIs, as well as multilateral development banks. Afreximbank introduced a US$3bn trade Pandemic Trade Impact Mitigation Facility, what we call PATIMFA, with a view to assisting Afreximbank member countries to adjust in an orderly manner the financial, economic and health shocks caused by the pandemic.
The facility also supported member countries’ central banks and other FIs to meet trade debt payments which fell due to avert payment defaults.
Under PATIMFA, the bank provided financing to governments, central banks, commercial banks, also sub-regional development banks and corporates, through various trade finance instruments such as term loans and lines of credit guarantees. As of December 2020, the bank had provided around US$7bn under that facility.
Henderson: The African trade gap is growing, and we’ve seen a dramatic impact across the continent following Covid. Unfortunately, I don’t think the world is fully aware what impact it’s had on simple imports and exports within the African context, where you just can’t get a container, or where it would have cost US$5,000 12 months ago, and costs US$20,000 today. These are major impacts for small businesses.
The DFIs have stepped up to the plate and seem to be doing a lot with the multilaterals, but lenders have to start being a bit more creative. We need more African alternatives. We still don’t see too many African-owned or African-driven funds in the trade and debt space; that’s where we need to encourage more growth.
At Artis we are focused on receivables-based finance. In Africa, in selected countries, we’re doing a lot of development work on using local currency securitisation-type structures that would work in the local investment and financing environment. One of the products is based on assisting emerging market banks, and particularly African banks, that can’t get confirmation lines or trade finance lines from foreign banks any longer. We are taking a receivables-type approach to their flows, and this is how we are trying to broaden the canvas as an alternative lender.
George: Crisis is nothing new to trade finance. Trade finance is designed to be short-term, to be flexible, and there are many different ways it can work to address this crisis. Africa is also no newcomer to crisis. It’s been dealt with many times, and I’ve seen a lot of examples where trade finance is still flowing. Africa and African trade has the capacity to absorb huge impacts The structures and the knowledge are there to get through this.
The real economy of Africa is driven by SMEs, and 90% of SMEs are primarily involved in retail and trade, so if you can boost trade, you can boost the real economy. What’s interesting is that any effort to do that always results in better economic growth and more opportunities for entrepreneurs. Trade can drive a very different agenda. Increasing transparency and accountability, while stamping out fraud, environmental damage and forced labour: all of these things come from a trade agenda.
GTR: We’ve heard about declining correspondent banking relationships, foreign exchange concerns and other trade finance pressures since the start of the pandemic. What trends have you observed, and how is this impacting the trade finance gap?
Nekati: Despite the challenges we’ve faced, the African Development Bank continues to take broad steps. We have an array of risk mitigation instruments that we have managed to extend. For instance, we have a risk participation agreement targeted at giving comfort to international confirming banks by allowing them to reduce their risk capital allocation whenever they are underwriting trade risks originating from Africa.
We also introduced a new instrument called a transaction guarantee facility. With this instrument, we’re going to be performing due diligence, appraising all issuing banks across a number of African countries, and then extending limits based on our assessment. That will help issuing banks which might not have an acceptable credit record in the eyes of these international confirming banks, so then they will have more comfort in taking on board the transactions that are originating from these issuing banks.
We see that anti-money laundering (AML) and know your customer (KYC) compliance has increased the cost of due diligence that an international bank would do before it can onboard local banks on the continent, and we see our role as helping to reduce that cost. We do that by working with other institutions, like Afreximbank, to put in place digital platforms that can help African issuing banks deal with some of these compliance issues.
Mashoko: There have been cancellations of correspondent banking relationships, which have resulted in a decrease in confirmation lines. The cancellations or reductions have been mainly attributed to the deterioration in perception of the risk profiles of end clients, with global banks pulling out of a market they perceived to be too risky. That has left many African banks at risk of not being able to conduct trade in foreign currency.
Given that commodity trade is predominantly priced in US dollar, African trade is highly vulnerable to the massive exodus of these international banks from the African correspondent banking space.
Pedreira: We can’t ignore that the demand for trade finance has also gone down a bit in Africa further to the Covid pandemic. When economic activity goes down, demand for trade goes down as well. However, the scary thought here – and this has been captured very well in the work that Afreximbank and the African Development Bank have done jointly – is that the supply of trade finance has gone down even further. This is where it becomes really concerning.
In terms of correspondent banking, undoubtedly there is a massive exodus, particularly around the US dollar space. Quite a few banks in Africa are being left without access to the international market, or just a single point of access that leaves them utterly dependent on pricing considerations, sometimes making their business unfeasible.
I think compliance issues are a force, but they are only prompting different issues which are of a commercial nature. Correspondent banks are exiting because the revenue they can generate from a tier two or tier three African bank does not compensate for the amount that they have to invest, as forced by their regulator, to keep these relationships afloat. So I would probably escalate the question to the regulators of whether we have gone too far, or maybe haven’t provided the right framework for correspondent banks to provide their services in a way that makes commercial sense.
My overarching question around the trade finance gap is: are we focusing on the right trade finance for Africa? Does it make sense, in the context of value-adding Africa, to talk exclusively about import letters of credit, pre-export finance, pre-payment finance, which are all linked to commodities? Where are the development frameworks for technology-led supply chain finance, between countries? This should be a pillar of the ACFTA: creating receivables discounting platforms, targeted at SMEs.
Toyoda: The correspondent banking relationship challenge is really tough for the African market. About 30% of African banks only have fewer than five correspondent banking relationships in the IFC network, so this issue is crucial. Moreover, about 40% of our network say they had correspondent banking relationship stress during Covid. Out of 163 respondents from our latest survey, 23 banks said their lines were actually cut during Covid. These are significantly high numbers, and IFC has strengthened the advisory programmes to address this concern.
We have also heard about forex concerns; this is really hurting our African banking network. Around 52% of respondents had liquidity issues coming from forex concerns, and liquidity control is an issue where we have to ask our government counterparties to consider policy change.
We need innovation here to close the widening trade finance gap, and this is good timing for change in Africa. Supply chain is key moving forward, and IFC is trying to help those needs in Africa. Actually, 91% of our survey respondents requested some kind of assistance in digitalisation, so I agree that what the African market needs is an innovative way to jump-start digitalisation.
GTR: How can digital trade help fight the consequences of Covid-19 and support the economic recovery we’ve been talking about?
George: There is a process underway, which is the digitalisation of all trade and of the entire economy, and some of that has been sped up incredibly by Covid. But what’s interesting is when we look at trade tech – which is bringing together all those different bits of technology in different ways – some of it is actually very old, like electronic signatures, digital approvals, even fingerprint recognition. It’s just the way they have been deployed, and particularly how they’ve been accepted, that has been a major barrier.
We’ve now gone past a point of no return when it comes to technology, and what I think is interesting around what that can deliver is in transparency and efficiency, and then really addressing ESG issues.
That is no longer a nice-to-have; it’s really central.
In terms of efficiency, there is obviously a host of technology around documentation, payments, approvals and KYC processes. But what I’m thinking about is the efficiency of actual production. Looking at crops, there are companies that can use drones, satellite data and sensors, so if there’s an outbreak of disease you know straight away where to spray, or if there’s a wildfire or unauthorised burning you can see exactly where it is and deploy your resources in the right place.
If you have proper transparency, you hugely reduce the possibilities for fraud and embezzlement. Then there’s the whole issue of people getting a fair share of the pie, and so as more and more farmers and traders are integrated into a digital value chain, there is the possibility for them to be properly recompensed.
Wade-Smith: Digital trade has the ability to be transformational. It’s cheaper, more efficient and helps to tackle challenges around risk perception and risk reality in Africa, and can help governments generate more tax revenue on the back of enhanced digital trade and digitisation. Many governments are struggling to generate the revenues they need, not just to pay for infrastructure but for everything else that is required of them. What digital trade also does is stimulate the fourth industrial revolution-type jobs. Being able to drive technology from Africa is really powerful, and has the ability to change people’s lives from a jobs perspective, as well as a client relationship perspective.
What is required is for governments and regulators to create the environment within which digital trade can flow, making sure regulations are fit for purpose, that they are modern, and that they’re creating the right sort of drivers. This is also really important for inclusion. We’re seeing this through fintech and mobile money, enabling the unbanked – often women, and those working in informal economies around Africa – to get access to greater financial inclusion, education and literacy. This empowers people across the continent to access micro-financing options, on the insurance side for example, which helps build more resilient economies for the future.
GTR: We’ve seen momentum building around the ESG agenda globally, driven by government initiatives, stakeholder activism, investor pressure and efforts to diversify away from oil and gas. In Africa, what sort of progress has there been in integrating ESG goals into corporate and investment strategies?
Henderson: ESG has become such a broad topic. We probably need more alignment when we talk about ESG objectives. Large institutional investors have internal policies and minimum requirements, and we’ve seen some of those adopted by the bigger banks across Africa as well as some of the multilaterals, but we’ve got to drill down a bit more into what that means on the ground in Africa. Beyond the financiers, we’ve got to talk to the entrepreneurs and SMEs, a lot of whom are still seeking basic guidance on this. For example, just having an equitable employment policy is not something they’ve ever considered.
Within ESG, there is a lot of focus on the ‘E’ part, on environmental damage and how we try to address that. The ‘S’ or social factors are also receiving attention. But governance – and this relates to AML, KYC and facilitating financing – is where a lot of entrepreneurs and SMEs still need guidance. It’s not about shaking a rulebook and placing extra auditing in front of them but getting these business owners up to speed with good business practice to start with.
If you’re trying to attract foreign capital, you just can’t get away from the ESG requirements of investors. Whether you’re an alternative lender or a fund or a bank, it is a requirement. Your investors or your shareholders expect you to put out some form of sustainability reporting or ESG impact report. The dilemma is whether we can get better harmonisation and consistency for all parties.
George: What is so complex about ESG is that if you really want to understand how to change the way you operate, as a financial institution or any kind of company, the question is not just ‘what is our carbon footprint?’ It’s not just ‘how much money do we lend to fossil fuel companies’, or ‘what is our exposure to cocoa?’
It has to go well beyond that; you’ve got to think about all of your suppliers and the impacts they are having on the environment, and how you might be contributing to these by doing business with them. This is now something the big institutions have started to think about: as an institution, are you able to influence your suppliers to move towards a lower-carbon, carbon-neutral or carbon-zero approach? Banks can really have an influence here.
GTR: We have seen efforts in the international community to bolster Africa’s vaccine supply chain, to respond to the virus and to promote longer-term health sector progress. There has been some success in that, but what more needs to be done?
Toyoda: Based on World Bank estimates, every month of delay in vaccine distribution would cost about US$14bn in lost GDP, but if you look at the global procurement of Covid-19 vaccines, only 2% have been procured in Africa. What the continent really needs is to be able to produce vaccines locally. IFC has just invested €600mn to support a South African company that can manufacture Covid-19 vaccines in the future, and this kind of investment is really important.
However, the first thing we will need is to support harmonisation around vaccine procurement. The vaccine standard has to be harmonised so that locally produced vaccines can be exported to other countries.
The second important point is off-take agreements.
If we think about building a sustainable market for locally produced vaccines, you need to have off-take agreements otherwise you will not be able to produce them in the first place, and it will be difficult for the private sector to come into this space.
The third point is around trade policy. In order to produce Covid-19 vaccines, you need so many different parts in production, and inputs have to be imported to the country that is trying to manufacture that vaccine. That means trade restrictions have to be corrected, as well as border controls and customs controls, otherwise importing these inputs will not happen.
Pedreira: The issue of local production of vaccines is absolutely critical. At Crown Agents Bank, we are heavily invested in deploying a fintech-led financial infrastructure, for example to pay health workers. For each person administering a vaccine, there will likely be another eight working at the vaccination centre, providing assistance. How do you pay all these people? It needs to be through mobile banking technologies, mobile money and so on. Africa’s got the fintech and the drive to do that.
The question is how to create this kind of independence, so we’re not in a position where we can only aspire to vaccinate 20% of the continent’s population by the end of the year, when quite a few so-called developed countries are already fully vaccinated. Globally, we’re only as strong as our weakest link, and frankly – given the effort Africa has put into prevention on the back of the Ebola and malaria experience, and the cost that has had for local economies – it seems rather unfair that Africa as a continent is now left to the tail end of economic recovery, simply because it is so dependent on the goodwill of vaccine-producing nations.
Watch the video here.