AfDB’s Morsy on how to bridge the pandemic-induced trade finance deficit

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.