The economic impact of the Covid-19 shock on Africa has been severe. Last year, its GDP shrank by 1.9% – the worst performance on record – amid plummeting trade volumes, reduced investment and a downturn in commodity prices. This year, although the International Monetary Fund (IMF) projects global growth at 6%, the African economy is expected to grow by only 3.2%.
To revive the continent’s economies, 18 African and European leaders recently convened in Paris to launch “a New Deal for Africa and by Africa”. The initiative, which covers access to Covid vaccines and large-scale investment in health, education, and the fight against climate change, represents a new focus on unlocking the potential of Africa to align economic development with sustainability – and trade will have a key role to play in achieving this.
Financing the recovery from Covid-19
In the very short term, solving the pandemic remains the top priority. While many African nations avoided the brunt of Covid-19, recording lower rates of infections and deaths than other regions, new and faster spreading strains such as the highly transmissible Delta variant are appearing, weighing on 2021 growth projections and widening socioeconomic disparities.
Through Covax, the vaccine pillar of the international community’s Access to Covid-19 Tools (ACT) Accelerator, and the African Vaccine Acquisition Task Team, hundreds of millions of doses will be distributed in Africa in the months ahead, while banks such as Standard Chartered continue working to finance the delivery of vaccines to where they are required.
It is not just vaccines that are needed: the pandemic also demonstrated the heavy import dependency and vulnerability of Africa’s pharmaceutical sector, and difficulties in procuring essential medical products from global suppliers have led to a push towards more regionalised supply chains as a means to boost resilience.
“Last year, we launched a financing initiative for companies that provide goods and services to help the fight against the virus, and those planning the switch into making products that are in high demand to fight the pandemic,” says Lina Osman, regional head of sustainable finance for Africa, Middle East, and Pakistan at Standard Chartered. “It has been used to support several entities with working capital facilities that allow them to get the necessary capital that they need. It was deployed quickly, and has been used by companies to provide healthcare facilities as well as supply masks, sanitiser and medicines amongst others.”
Connecting African value chains
The supply chain disruptions brought about by Covid-19 also strengthened the case for unlocking the continent’s business potential through the African Continental Free Trade Area (AfCFTA). According to the latest available figures1, intra-regional trade in Africa accounts for around 16% of the total, versus 68% and 60% in Europe and Asia respectively. With the agreement now in force, opportunities abound to develop intra-African regional value chains, explains Syed Khurrum Zaeem, head of trade and transaction banking for Africa and the Middle East at Standard Chartered.
“The AfCFTA can be leveraged to facilitate and promote Africa’s supply chains in numerous sectors,” he says.
“In food for example, several African countries are actually net exporters, but they supply outside of the continent instead of within Africa. Through the AfCFTA, countries such as South Africa, Ghana and Côte d’Ivoire have the opportunity to trade with African partners. This not only promotes sustainable trade growth and resilience but it also creates jobs, which is a key social angle.”
In order to take full advantage of the AfCFTA, however, Africa must close its infrastructure gap. According to a recent report by consultancy firm McKinsey, nearly 600 million people in sub-Saharan Africa lack access to grid electricity.2 Meanwhile, inadequate transport infrastructure adds as much as 40% to the costs of goods traded among African countries, holding back cross-border business.
“It is estimated that, on a pan-African basis, the infrastructure deficit requires as much as US$80bn of investment per year,” says Tejinder Singh, head of global subsidiaries for Africa at Standard Chartered. “While the big headline is the large infrastructure investment, in reality, this cannot work without the smaller components of cross-border trade. Whether it is operating facilities, regular import-export, or the procurement of inventory, raw materials and spares, there is a lot of trade that happens on the back of the large infrastructure projects. Without working capital finance, primarily sustainable trade finance, some of these projects can quickly grind to a halt.” He adds that today, more than ever before, financial institutions are focusing on the working capital component of large infrastructure projects before committing long-term capital.
Making trade count
As Africa looks ahead to a sustainable post-pandemic recovery, improving the health and resilience of its supply chains will be vital.
“Whether it is farmers, distributors, suppliers, or the kind of input mix, solving for the supply chain is a huge priority for the multinationals, but it is also very often the hardest part of the solution because they don’t have direct control over it,” says Singh. “This requires both advisory and financing solutions. Using our trade finance tools, we are working with them to help incentivise a move away from the traditional emissions-oriented way of doing things to more sustainable formats, whether that be through pricing benefits, KPI-based sustainability indices, or by encouraging the use of new technologies to drive sustainability in the supply chain.”
“Many of our clients in Africa are now appointing heads of sustainability or sustainable finance within their teams,” adds Osman. “They are exploring how they can change the way that they operate their businesses, and looking at sustainability not as a requirement or a cost, but as an opportunity to reduce operational risk and to improve efficiencies, and that improves the bankability of a lot of the transactions that we do with them.”
As a result, this new focus on sustainability has the chance not only to foster inclusive productivity growth and competitiveness across Africa, but open up new opportunities for trade, both within and outside the continent.
Many of our clients in Africa are now appointing heads of sustainability or sustainable finance within their teams. They are exploring how they can change the way that they operate their businesses, and looking at sustainability not as a requirement or a cost, but as an opportunity to reduce operational risk and to improve efficiencies.
Partnering to enable vaccine trade
In July, Standard Chartered agreed to provide US$200mn of not-for-profit funding towards the African Export-Import Bank’s (Afreximbank) structured framework to help finance the acquisition of Covid-19 vaccines for African nations.
The financing is used by Afreximbank to ensure payment to identified vaccine manufacturers that have vaccine orders placed by African nations through the African Medical Supplies Platform.
“Africa currently accounts for less than 2% of the Covid-19 vaccinations that have been administered globally,” says Osman. “As leaders on the continent seek to ramp up capacity in vaccine manufacturing, this financing will contribute to enabling Africa to achieve its strategy of vaccinating a minimum of 60% of its population, which will drive the economic and trade recovery.”
The funding is part of Standard Chartered’s US$1bn financing commitment that was launched in March 2020, which aims to tackle the pandemic by financing vital equipment such as personal protective equipment, ventilators and now vaccines. To date, US$900mn has been allocated and over US$700mn disbursed to clients.
Co-lending to finance Africa’s future
Last year, Standard Chartered signed a facility agreement with the Tanzanian government for a US$1.46bn term loan to fund part of the construction of the Standard Gauge Railway (SGR).
The deal, which represents the country’s largest foreign currency financing to date, comprises an export credit agency (ECA) covered facility of US$990mn from the Swedish and Danish ECAs, a development finance institution (DFI) tranche of US$200mn from the Development Bank of Southern Africa (DBSA), the Trade and Development Bank (TDB) and the African Export-Import Bank (Afreximbank), and a commercial bank tranche of US$270mn. Standard Chartered Tanzania acted as global co-ordinator, bookrunner and mandated lead arranger.
“This is a great example of an innovative financing structure,” says Singh. “It includes a commercial tranche, a development finance institution tranche, and support from five export credit agencies, all bringing to bear a sustainable transport link solution that will really help transform the landscape in Tanzania.”
The original article was first published on Global Trade Review.