Closing the trade finance gap in Africa

by MMC
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A combination of geopolitical risks, a liquidity challenge resulting from a stronger US dollar and weaker local currencies, as well as the cost of living crisis and rising interest rates, have created a environment in which banks are more reluctant to take risks in Kenya and Africa. – limit investments by States in emerging markets in transformation projects.

In Kenya, the Covid-19 pandemic has led to a 45% reduction in foreign direct investment (FDI) flows into the country, according to the 2021 investment report of the United Nations Conference on Trade and Development ( Unctad), which estimates these flows at 76 billion shillings ($717 million). ) in 2020, compared to 131 billion shillings ($1.3 billion) in 2019. The decline in FDI was not unique to Kenya as inflows into sub-Saharan Africa declined by an average of 12 percent to 3. 1 trillion shillings ($30 billion) in 2020.

Before the pandemic and associated lockdowns, Africa was making progress in closing the trade finance gap as emerging markets attracted capital. But this situation is rapidly reversing, leading to a growing trade finance gap of nearly $120 billion per year, threatening to leave Africa behind once again, lest we, as stakeholders, adopting a more nuanced approach to risks and partnerships in 2024.

Unfortunately, even as Africa begins to gain momentum, it is often negatively affected by external factors beyond its control. The downsides of the global economy are manifesting themselves aggressively on the continent, including the 2007-2008 global financial crisis and the Covid-19 pandemic.

During upward swings in business cycles, we see African countries build some confidence, taking on debt for key projects aimed at supporting long-term, sustainable and resilient growth goals… then a crisis occurs and interventions are often applied aggressively.

For example, fears that Kenya had defaulted on its $2 billion Eurobond due 2024 worsened the liquidity crisis in the foreign exchange market, which kept inflation high and led the Central Bank of Kenya (CBK) to raise its key rates to contain it. This situation quickly reversed after the government returned to the market and successfully refinanced it, but by then the economy had been hit hard.

For Africa to emerge from this stop-and-go situation, we need to identify practical steps that can be taken to unlock affordable financing.

This is firstly to ensure that necessary structural reforms are prioritized in African economies, and secondly to drive the narrative that Africa is an attractive investment destination for patient capital.

Structural and fiscal reforms in Kenya are already bearing fruit in improving investor confidence. The local currency infrastructure bond issued immediately after the redemption of the 2024 Eurobonds was oversubscribed 4.1 times. Kenya also managed to scale up its Extended Credit Facility/Extended Finance Facility program, with the IMF securing a $500 million samurai bond, and is expected to receive at least $750 million in budget support from the Bank worldwide.

Across Africa, we continue to see many international banks taking a more nuanced approach and a more optimistic stance than previously seen. This patient approach could be the best way to overcome multiple crises as Africa continues its path toward economic development.

As global banking groups benefit from larger pockets of funding, it is imperative to coordinate efforts on local capital pools. This brings us to our second practical step: partnerships. In recent years, we have seen increased collaboration between banks, development finance institutions and insurers – particularly as environmental, social and governance (ESG) financing frameworks mature.

Funding pools are growing and, as a result, there is a renewed focus on the social (“S”) side of ESG, with particular interest in projects that prioritize the economic participation of women and youth . It is imperative that African financial institutions, like Absa, are at the forefront of global efforts to define and inform policies and frameworks around the “S” of ESG – if we fail to do so. head, the trend will be towards a huge bias towards global markets. the Northern agenda and priorities.

Furthermore, African economies should – individually or through the regional collective – be bold in implementing those ESG priorities, such as “S”, which primarily correspond to their own development agenda. After all, Africa is on the cusp of large-scale industrialization – this should be deeply rooted in sustainability and inclusiveness – and learning from the mistakes of the North.

Finally, increased digitalization and technology adoption must become a priority. The African fintech sector has successfully attracted local and international funding, providing a model of success for early-stage capital in Africa.

For Africa to effectively tackle the trade finance gap, we must no longer continue with business as usual. Actors across the continent need to spend more time understanding the nuances around supply chains. Ultimately, we need to build resilience and sustainability.

The authors are specialists in trade finance and working capital.

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