Mushtak Parker
London: One of the key drivers of getting the global economy on the road to recovery from the disruptions of the Covid-19 pandemic is trade. The mantra is to trade your way out of recession to an economic turnaround.
The essence of Global Britain, for instance, is seeking new trading partners and agreements following Brexit and the absence of a final EU-UK trade pact. Global trade was projected pre-pandemic to expand by 2.7% last year, but contracted by 9.2%.
The International Monetary Fund’s (IMF) pre-pandemic forecast similarly for world GDP growth last year was 3.3%, only to contract by 3.5%.
The result for continental Africa is that it suffered its first economic recession in 25 years. Capital outflows from South Africa in Q1 2020 alone amounted to $3.1 billion.
For Pretoria, there are precedents, of which the notable achievement was in the 1980s during prime minister Turgut Ozal’s tenure in Turkey, an ex-World Bank technocrat who spent time in South Africa. Ozal’s clarion call to business and banks was “export or die”. A free marketeer, he opened a heavily centralised Turkish economy in the aftermath of the last military coup in 1980. Turkish contractors amassed $20bn worth of projects in the Middle East alone in that decade. He abolished capital and export/import controls which formed the basis of the Turkish economic miracle in the next three decades.
A survey just published by Afreximbank, the multilateral trade finance bank of Africa, and its partners, confirms that African, including South African, trade, was constrained by several factors, including lack of competition and qualified human capital, expensive correspondent banking, lack of forex liquidity and risk capital, and regulatory restrictions.
But the biggest constraint, according to 370 commercial banks surveyed, was a serious lack of trade finance including L/C (letters of credit) confirmation, without which trade can neither materialise nor flourish. Supply chain disruptions in goods, spare parts and services was just as much due to a lack of trade finance and government support, as it was to other factors. The pandemic merely exacerbated and exposed the fault lines in the structure of African trade.
In a real economy under pressure this translates into shortages, frugal supermarket shelves, queues, food poverty and an even greater inequality gap.
The IMF, at its meetings this month, warned that Africa would need additional foreign funding of $425bn (about R6 trillion) over the next five years “to support future growth and transformative reforms”. The region is projected to grow by 3.4%, buoyed by the global recovery, increased trade, higher commodity prices, and a resumption of capital inflows.
However, Sub-Saharan Africa (SSA) will be “the world’s slowest growing region in 2021, and risks falling further behind as the global economy rebounds with a cumulative per capita GDP growth over the 2020-25 period projected at 3.6%, substantially lower than the 14% in the rest of the world.”
That intra-African trade, over the past eight years, averaged a paltry 17% of the total trade of the continent is a reality check for Treasuries, DTIs, continental and regional development banks, exporters and importers. Of this, commercial bank-intermediated trade finance accounted for 18% of intra-African trade.
SSA exports, according to the IMF, amounted to 20.2% of GDP last year, down from 23.8% in 2019, with a slight projected rebound of 21.8% this year and 21.4% next year. South African exports followed the trend reaching 30.5% of GDP this year and was expected to rise to 31.1% and 31.3% this year and next year.
Similarly, SSA imports accounted for 24.8% last year, down from the 28% in 2019, and projected to rise 25.8 and 25.5% this year and next year. South African imports reached 25.5% of GDP last year and was expected to rise to 28.0% and 29.7% this year and next year.
The total value of SSA exports (FOB) in 2018 was $281.85bn, while the total value of imports (CIF) was $273.35bn.
South Africa, says the Afreximbank survey, has consistently accounted for more than 24% of intra-African trade in 2019 and last year.
“Southern Africa has the largest export potential to the rest of Africa, approximately $53bn. The products with the greatest export potential include machinery, apparel, chemicals, motor vehicles and parts,” it added.
How to overcome the SSA’s trade finance conundrum? The average annual trade finance gap was a whopping $81bn in 2019, transacted predominantly in US dollars. While bankers remain optimistic that the volume of L/Cs will pick up this year, especially for intra-African trade, trade finance is driven by risk perceptions and mitigation, regulatory and other fees, and export credit insurance.
Correspondent banking to confirm L/Cs especially in forex transactions for exporters and importers in emerging markets is expensive and beholden to a string of compliance caveats including AML (anti-money laundering) and KYC (know your customer) requirements. Since 2011, the same four international banks – Citibank, Commerzbank, Standard Chartered Bank and Deutsche Bank – have dominated L/C confirmations issued by African banks, mainly by South African lenders.
A primary goal of both Afreximbank and the African Continental Free Trade Agreement is facilitating and boosting intra-African trade. Perhaps they should explore another precedent in mitigating the costly impact of Western correspondent banking through the proven alternative of Bilateral Payments Arrangements, pioneered by Malaysia in 1980s whereby the trade bill between two countries is settled annually through the respective central banks with five local banks on each side acting as facilitators.
It was so successful, that when PM Mahathir tried to expand it to a multilateral level, the IMF threatened to expel Malaysia for violating its rules.
* Parker is an economist and writer in London.
** The views expressed here are not necessarily those of IOL.