AfDB’s Morsy on how to bridge the pandemic-induced trade finance deficit
The African Development Bank says it is becoming clear that the on-going COVID-19 pandemic could add to the burden of risks facing African trade and trade finance as the pandemic has already resulted in sharp falls in the prices of most of Africa’s top export commodities. Hanan Morsy, Director for Macroeconomic Forecasting and Research at AfDB joins CNBC Africa for more.
Wed, 30 Sep 2020 14:38:58 GMT
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AI Generated Summary
- The significant trade finance deficit in Africa, exacerbated by the COVID-19 pandemic, poses risks to African trade and finance, with sharp falls in commodity prices and limited access to foreign exchange liquidity.
- Approval rates for SMEs have dropped over the last decade, mainly due to increased compliance regulations, highlighting the need to support banks in addressing these challenges to prevent SMEs from being further marginalized.
- Development finance institutions are crucial in supporting trade finance in Africa, with risk guarantees playing a key role in facilitating trade transactions and sustaining cash flows during the pandemic.
The African Development Bank is sounding the alarm on the impact of the ongoing COVID-19 pandemic on African trade and trade finance. Hannah Morsey, Director for Macroeconomic Forecasting and Research at AfDB, highlighted the significant challenges facing the continent as sharp falls in commodity prices have already affected Africa's top export commodities. In a recent interview on CNBC Africa, Morsey discussed key takeaways from the AfDB trade finance report for 2020, emphasizing the need for urgent action to avert further negative implications on African businesses and livelihoods. The report revealed that pre-COVID, the trade finance deficit in Africa was already substantial, reaching around $91 billion over the last decade. Despite Africa accounting for only three percent of global trade, the region holds a staggering 50% share of the global trade finance deficit. However, there has been progress in reducing this gap, with a 32% decline in the deficit over the past decade, a commendable achievement. The concern now is that the pandemic could undo this progress, with COVID-19's adverse effects on African banks' balance sheets making them more cautious about lending, leading to a potential liquidity crunch for African countries heavily reliant on imports. Additionally, the collapse of commodity prices, alongside reduced tourism and remittances, will exacerbate the foreign exchange liquidity issue. The disruption caused by COVID-19 containment measures will further impede trade transactions, creating more challenges for African businesses. The report also highlighted a significant drop in approval rates for SMEs over the last nine years, except for a slight increase in 2017. This decline is attributed to factors such as stricter compliance rules related to regulations like know-your-customer and anti-money laundering, disproportionately affecting African banks and making transactions less feasible for SMEs. To address these challenges, Morsey stressed the importance of supporting banks in navigating these new regulations to ensure SMEs are not left behind. Development finance institutions have played a crucial role in supporting trade finance in Africa, with risk guarantees emerging as a vital tool in the current environment. The African Development Bank's trade finance program has approved $1.4 billion in credit lines, supporting over $4 billion in trade flows and providing credit risk guarantees for over 1,800 transactions, with 60% benefitting SMEs. Moving forward, these initiatives will be crucial in keeping the cash flowing and sustaining trade finance on the continent amidst the pandemic-induced disruptions.