COVID-19 - DFIs Response in Support of the African Financial Sector

Webinar Report: COVID-19 - DFIs Response in Support of the African Financial Sector

Apr 28, 2020 | Global (online)

Context

As part of its series of activities on the impact of the COVID-19 pandemic, Making Finance Work for Africa (MFW4A) hosted a webinar on Development Finance Institutions’ (DFIs) response in support of the African Financial Sector (AFS) following the pandemic. The webinar follows a previous  one held with African financial sector practitioners and business leaders on the impact of COVID-19 on their respective operations.

The COVID-19 pandemic is undoubtedly a major challenge for the economies of developing countries, which are suppliers of raw materials in global value chains. The main export products of African countries have seen their prices fall due to the drop in global demand. This sharp fall in prices poses a serious threat to fiscal balance, external debt sustainability and growth prospects of the major economies of the African continent. At the sectoral level, transport and tourism are at a standstill, with disastrous consequences for employment and growth. Growth prospects on the African continent in 2020 are estimated to be negative: between -2.1% and -5.1%, the first expected recession since 1995. This necessarily entails increased risks for the AFS. Some domestic banking systems may require recapitalization or restructuring, due to the projected increase in non-performing loans, declining revenues, drying up of bank liquidity and deteriorating regulatory compliance ratios. 

Some key recommendations coming out of the previous webinar appear as follows:

1. Partially “de-dollarize" financial assistance provided;

2. Develop cross-border activities/investments on African capital markets;

3. Inject cash into regional financial institutions;

4. DFIs to set up risk mitigation instruments;

5. Provide long-term resources at preferential rates;

6. Fund expansion of digital finance platforms and so-called "Fintechs" solutions

Given the seriousness of the COVID-19 pandemic and the resulting impacts largely discussed during the first round of the webinar series, this session dedicated to the DFIs response allowed panelists to assess and discuss the most appropriate instruments to support the regional financial sector. Discussions also focused on potential challenges and lessons learned from previous crisis, including the 2008 global financial crisis and the 2014 Ebola epidemic in West Africa.

Summary

As part of the DFIs responses to the pandemic impact on the regional economy and financial systems, this webinar session explored and discussed some mitigation measures and instruments implemented by regional and bilateral DFIs including the African development Bank (AfDB), the African Export Import Bank (Afreximbank), the Agence Française de Développement (French Development Agency - AFD) and the Development Bank of Southern Africa (DBSA). In this pandemic context, several domestic and regional challenges require support from development finance institutions to better manage rising fiscal pressures, economic shocks and even enhance public health systems. The recessionary environment compels development stakeholders to not only extend financing facilities to African governments, but also support the African private sector. For instance, various facilities and initiatives have been put in place by some DFIs including the International Monetary Fund (USD 100 billion), the World Bank (USD 14 billion), the European Union (EUR 15 billion), the AfDB (USD 10 billion) and Afreximbank (USD 3 billion) for immediate healthcare systems financing and domestic responses to economic/financial shocks.

In dealing with the Covid-19 economic fallout, the African Development Bank has set up a 10 USD billion program named COVID-19 Rapid Reaction Facility (CRF), of which up to USD 8.7 billion are dedicated to sovereign and regional operations in support of Regional Members Countries (RCMs), while USD 1.3 billion support Non-Sovereign Operations (NSOs) in all African countries. The CRF focuses on the most urgent operations and more broadly, aims to support African governments in attracting and encouraging support from multilateral, bilateral and commercial lenders.

On trade finance, the $3 billion Afreximbank facility Trade Pandemic Impact Mitigation Facility (PATIMFA), facility has been designed to alleviate the impact of the pandemic on member countries. The multi-currency facility will provide financing to governments, central banks, commercial banks, national and sub-regional development banks and corporates. The PATIMFA is available to member countries’ institutions through various financing instruments including direct cash advances, terms loans, lines of credit, guarantees and cross currency/interest rates swaps. The 3-year facility’s strength lies in its ability to strengthen members’ trade capacity, particularly vendors payments denominated in foreign currency.  The PATIMFA also provides flexibility in reimbursements, including possibility of direct repayment from the beneficiary, debit of cash collateral account, liquidation of assets like treasury bills/bonds, listed shares used as collateral and identified receivables (such as commodity-based royalties and identified export proceeds).

The French cooperation agency, the AFD, will also provide additional financial support up to 500 EUR million by fast-tracking and easing disbursement to existing partners. Furthermore, as the African microfinance sector is crucial for the dominant low-income population and particularly exposed to a number of risks, the AFD Group (including Proparco) and the European Union are working on a new guarantee scheme aiming at de-risk new operations in the AFS. In the long run, the AFD will provide financial institutions and regulatory bodies with resources to enhance their counter cyclical role during the recovery phase. Digitization and accelerated initiatives towards achieving the 2030 Agenda including Climate and SDGs for a green and inclusive recovery post-COVID-19 will be prioritized.

In Southern Africa, the DBSA’s response has covered the humanitarian, short-term and long-term areas with support for disaster management and health equipment, economic recovery and urgent infrastructure-related projects.

All DFIs' representatives responses emphasized on the fact that their response include help for African governments to cushion the negative impact of the Covid-19 pandemic by strengthening healthcare systems and for African financial institutions to access the funding they need in a context of scarce resources. They acknowledged that the effectiveness of DFIs' responses depends on their ability to quickly respond to the AFS requests and provide flexible solutions.

The panelists addressed the issue of dollarization. As African financial sector stakeholders are more and more willing to increase cross-border transactions through local currencies, they face a difficult trade-off between the risks/costs and benefits associated with each financing solution.  Local currency financing solutions are possible and available but they must be supported by a stable macro-economic environment to attract more financial institutions and regional stakeholders. Currently and as an example, most of AfDB facilities are mainly available in hard currencies such as Dollar, Euro, Yen and South-African Rand. Panelists also recalled how DFIs usually set up long-term instruments to support regional economies with a growing focus on the sustainable outcomes of financed projects. Specific strategies to support the African youth employment should also necessarily pass through a two-pronged approach: the first should be based on skills development by updating national education systems and adapting them to emerging job’s markets needs; the second is related to the productive supply and implies supports to startups, Micro, Small and Medium sized Enterprises (MSMEs) and entrepreneurship through reinforced credit lines, technical assistance programs,  guarantee mechanisms  as well as financing from  private equity and venture capital funds.  Regarding the social impact of DFIs’ responses, the new facilities are largely designed to provide financial support and technical assistance to African governments and firms, including SMEs, to help them manage costs effectively and limit jobs destruction; in other words, promote sustainable jobs creation for the longer term. In this regard, impact measurement should be a critical component of financial institutions policies. As suggested by a participant, this new impact evaluation approach should definitively help financial institutions operating in Africa to avoid duplication, better assess domestic/regional disparities and increase efficiency of their interventions.

The following recommendations have been made by the panelists:

·         - Ensure the financial sector recovers rapidly while meeting the basic financial needs of the most vulnerable populations;

·         - Help financial authorities and regulators to build resilience and better prepare for new shocks;

·         - Encourage governments and financial sector stakeholders to work toward the sustainability objectives notably a need for a green and inclusive recovery. 

For more details on this session’s content, the event recording is available below. The webinar presentation can also be downloaded via this link.