The global financial crisis and the resultant high levels of uncertainty are severely constraining trade in Africa. Demand for exports has fallen, as have commodity prices, while the use of trade instruments, particularly letters of credit, has declined along with global trade volumes. At the same time, the price of credit has risen and banks have shortened the maximum tenors offered in line with their lower appetite for risk. Moreover, availability of import finance facilities is being sharply constrained by a lack of liquidity in international markets. Regional banks seeking to expand their servicing of other African commercial banks are finding that limited access to US Dollar liquidity constrains their ability to do so. Larger exporters have, in the past, been able to access the syndicated export finance markets. However, similar to the funded import finance market, the syndicated export finance market is currently constrained by lack of liquidity, fewer participants, and credit concerns. Furthermore, as commodity prices are falling, warehouse and asset-backed deals are less financeable due to increased collateral requirements and higher risk perceptions. Finally, as in the import markets, regulatory change and the impact of write-downs of other assets are increasing the cost of funding and constraining its overall availability.
In response to rapidly deteriorating conditions in the international trade finance markets, which triggered an urgent request for help from African Ministers of Finance,1 the AfDB’s Board of Directors approved on March 4, 2009 a proposal to extend up to USD 500 million in the form of lines of credit to African financial institutions to support their trade finance operations (TF LOC). This program for TF LOCs was presented as the first phase in the Bank’s multi-part Trade Finance Initiative (TFI) of up to USD 1 billion. Since launching the new trade finance product, demand has risen quickly and the Bank is currently processing several facilities that will be presented for Board consideration in the second half of 2009.
In parallel with the deployment of the Bank’s TF LOC program, several other programs under the umbrella of the TFI are being developed. In February 2009 the Bank launched a field study to better understand the constraints in the trade financesector in all of the major Continental markets. It also began technical discussions with the International Finance Corporation (IFC) to participate in a joint initiative called the Global Trade Liquidity Program (“GTLP” or the “Program”). On April 14, the Bank hosted a roundtable meeting of Development Finance Institutions (DFIs) and commercial banks to discuss the state of Africa’s trade finance markets and to assess the adequacy of the Bank’s TF LOC and the proposed GTLP to address the constraints.
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