Clarissa Dann Welcome to Trade Finance TV coming out of lockdown. I’m your presenter, Clarissa Dann, and joining me in the virtual studio today, we have Jaiyeola Dauda (Head of Trade Finance, Nigeria, Deutsche Bank, and Dr. Rebecca Harding (Trade Economist and CEO of Coriolis Technologies). We’re here to talk about trade and its flows in sub-Saharan Africa, with a closer look at Nigeria.
Rebecca, would you like to make a start and explain your interest in sub-Saharan Africa?
Dr. Rebecca Harding I guess all the way through my career, ever since I started studying economics, the issue of trade and trade-not-aid, has been absolutely fundamental to understanding what’s going on in the global economy. So I’ve always had a deep fascination for economic development and as I went into the trade space, obviously the issue of how you create sustainable economic development by facilitating trade from the bottom up across the African continent, is absolutely central to everything that I’ve wanted to do in my career.
Clarissa Dann Thanks, Rebecca. Jaiyelo, you’re from Lagos itself. Could you tell us a bit more about why you decided to go into exports and financing those and your relationship with the Deutsche Bank?
Jaiyeola Dauda I would say I stumbled more or less into trade finance and I was new to trade financing since 2000, mainly covering West Africa, and more in the last few years we’ve also added sub-Saharan Africa to my bid. Like Rebecca said, I mean, it’s interesting looking at the bids and flows of transactions across regions, across countries, and also looking at the items of import. It also gives you an idea of what the people are about. And so it’s been an interesting over 20 years or so in trade finance for me.
Clarissa Dann Sounds a bit of a love affair all around me. Let’s move to our first question. We’ve been seeing how COVID-19 has sent economies backwards. What are you seeing in terms of how it’s been shaping sub-Saharan Africa, and in particular, what’s coming in and out of Nigeria?
Dr. Rebecca Harding I think the most important thing is the oil price, because Africa remains very commodities dependent, and so if you look at the proportion of Africa’s trade that’s in commodities, it’s almost 70%, so it’s a very, very large component. I think the way out of this and what we’re seeing is a lot of reform process in individual countries around Africa. But the big challenge will always remain the infrastructure to start moving ordinary goods, non commodity based goods around the country, and it’s that in a post-COVID-19 world that we need to focus on
Clarissa Dann Jay, government responses. Are they different in different countries or are the countries kind of working together?
Jaiyeola Dauda I will say more or less each country has a different approach to it, but I think one thing that is quite similar across all the regions is the impact on the economy. Where you have low impact, the moderate impact and then the high impact, and with the low impact it will be in the food sector, because everybody has to eat. And then you have the chemical sector, so obviously, everybody is trying to manufacture sanitizers, those who have the health sectors for obvious reasons. You have the packaging sector, you have the personal care industry. All those industries have some sort of low impact, including telecom, because everybody is on media now.
And then where you will find a medium impact will be the construction industry, the education industry, you have the electricity industry, but where we have seen a very, very high impact would be banking and finance, because everything has more or less shut down. The entertainment and leisure and travel. And obviously, like we said at the beginning, the oil and gas. And then finally you have the trading and transportation, because people come over and because there’s a lockdown, our economies are mainly informal rather than formal, so people going on the streets, buying and selling, that has come completely to a stop, just in the first few months of the virus hitting Africa.
Dr. Rebecca Harding I agree completely and I think it is important to remember several things. The first is that the oil price in the first instance wasn’t Africa’s fault. It wasn’t even COVID-19’s fault; it was a disagreement among the OPEC members. So that actually triggered a crisis and the simultaneous collapse in trade, and a collapse in oil prices that has then exacerbated the COVID-19 problem for Africa. So Africa has actually been blown about, if you like, by some of the things that have happened outside of its own control, and I think it’s really important to remember that.
Second thing is that Africa itself is used to dealing with pandemics. It’s used to dealing with viral crises. And so actually the infection control infrastructure in Africa and the young population means that even though cases are rising, we’re actually fairly confidant about how Africa can pull out of this crisis. So the scope for what we’re talking about, which is effectively diversification in the future, more going on on the ground, is very high. And I think they also have to look at the intra-regional trade network; so the African continent, free-trade area, what’s going to happen with all of that? Whether or not that’s actually going to develop some momentum behind it in order to be able to develop the African infrastructure, because if that can happen, Africa can come out of this crisis very positively indeed.
Clarissa Dann At the moment the intra’regional trade is around 10% of all trade isn’t it, it’s not much. Was that looking like it could improve, because of what’s happened?
Dr. Rebecca Harding Our estimates are slightly higher than 10%, although it’s about we think is about 16%, but that is because we mirror trades between countries, so we pick up gaps in the data and so we get a slightly higher figure than everyone else. But the issue is always infrastructure, and I’m going to keep coming back to this point, because the problem with intra-regional trade, if you produce a car in South Africa and then can’t get it to Ghana or you can’t get it across to Kenya or Ethiopia, it becomes very difficult for the manufacturers who are producing things.
So what we’re seeing, and actually what we’re predicting at the moment is an extra regional trade will pick up more quickly than intra-regional trade, and that’s important because everywhere else in the world it’s becoming less dependent on outside intra-regional trade. Everywhere else in the world it’s growing as a result of COVID-19 and as a result of all of the patterns that have been happening over the last few years. So I think that’s a very important point to make; that this intra-regional trade is actually where all the efforts should lie now.
Jaiyeola Dauda We have practical examples here. For the last one year, the border between Nigeria and Benin Republic, which is a neighboring country, has been shut. The reason for that for the Nigerian government is simply because of there’s a lot of smuggling going on there. Benin is one of the highest importers of rice, but it is very small population compared to Nigeria. So obviously, all the rice ends up in Nigeria, and it’s the same with cars and also other products. But what that closure of the border has done is; you have quite a lot of multinationals who are producing in Nigeria and exporting within the region of West Africa. You have quite a lot of multinationals in Ghana who are producing and are also exporting within the region, including into Nigeria. What has happened now is those flows cannot move by road, because there’s a heavy flow that goes by road.
You don’t find a lot of shipping traffic between Nigeria and Ghana just because it makes no sense. And so some companies having to send their goods by ship to Europe, who are now also finding their way transiting back to Ghana, and that will be the big challenge when we talk about intra-regional trade. So, I think you’ll find more of that among the Francophone than you find around the Anglophone region. And so those are the things that need to be dealt with in terms of barriers to trade. The economic group has been to Nigeria and talked to the government several times, but the Nigerian government is not budging, because they expect some things to be in place before they allow the border to open. So that will be a big challenge if governments can’t talk to each other and find a meeting point in terms of allowing goods to move across the region
Clarissa Dann With so much volatility and disruption, people working from home and some industries shut down altogether, what is the effect on the supply and demand for trade finance?
Jaiyeola Dauda Obviously the main challenge is the effect to liquidity in our various markets, particularly when you look at Nigeria, where about 50-60% of our dollar received is from the sale of crude. That has been affected significantly the available dollar liquidity in the market. And so when you take a survey of all the central banks of Nigerias policies in the last six months, they have been around managing of effects in the market. So fx, they have policies where they sell to importers in Nigeria. We can no longer portray certain goods from middlemen. We wanted to go directly to the manufacturers. This was in order to reduce what is owned by the various middle men. That policy that still being discussed, we don’t know how far that will go. And it’s interesting because Nigeria imports quite a lot of maize, by the way, because local production is not able to satisfy the demand locally. It serves as a feedstock into several manufacturing processes in the country.
So the central bank has come to say, ‘listen, we no longer will support importation of meat. Therefore, if you need to import maize, you need to source your dollars yourself. However, we give a a feat to a few companies who can import, in order to help the guys who are using it for feedstock locally.’ What that has done is with all this policy is it has pushed quite a lot of people away from the official market into what we call the parallel market or the black market. pressuring again the Nigerian naira. It’s like a vicious circle. The central bank stopped selling dollars, which usually serves as a last mile for people who need to pay school fees or pay medical bills abroad. That affected the naira-dollar exchange, dollar went up to about 470 in a couple of weeks. When the central bank saw that, immediately they started selling below the trench again, and that again dropped the dollar to a large extent about 445-455, so all the policies have been around managing dollar liquidity, because it is not exactly there at the moment. And they need to manage it because they’ve seen the reserve steadily go down in the last couple of months since COVID-19 started.
Clarissa Dann What do we think the economic recovery will be looking like, given that we’re living with COVID-19?
Dr. Rebecca Harding If we’re looking at the next 12-18 months, there are a number of challenges that we’re all going to have to work through, and Africa is no exception. So I think that’s something we need to say about the state of the world at the moment, that Africa is going to be influenced very heavily by what happens with whether or not there’s a second wave, whether or not global demand picks up, whether or not if global demand doesn’t pick up, there’s a general financial crisis. Because of one thing, which is that insurers are finding it very difficult to move into higher risk markets, particularly in trade, and that’s actually restricting trade. So the weaker demand is the more there’s irregularity in trade, the more the insurance companies are going to say, ‘that’s high risk, we can’t do it because we don’t know what’s going to happen to trade across the world, so we’re moving out of these high risk markets.’
I think the danger that Africa faces at the moment is that a huge amount of trade that goes on is informal. We can’t measure that, I mean I’ve tried and it’s very difficult to measure fully and understand what’s going on. I think, therefore, it’s going to be very difficult to get the trade credits and the export finance, particularly for the intermediate manufacturers that’s going to enable that trade, because we’ve seen a reduction in the number of counterparty banks. We’ve seen a reduction in the level of insurance backing up high risk propositions. And so this, with where Africa sits within the global markets, is going to be a very critical next 18 months. However, on the plus side, the positive thing that could happen is that Africa actually doesn’t have a pandemic in the same way that the rest of Europe or North America has had. That we actually managed to keep these things under control and therefore that Africa itself can build up from the bottom, in a way that’s appropriate for Africa with its strong supply chains, and I always err on the side of optimism, because I think there’s a huge desire within African policymaking circles to enable that to happen and to come out of COVID-19 on the positive sid. We’re thinking it will take longer to recover, probably three years, but there is a recovery on the horizon.
Clarissa Dann As a Western bank in sub-Saharan Africa, we like to see ourselves as part of the overall solution. It was something Christian Sewing talked about when he was first talking about COVID-19. How is that playing out, Jay, and how do you see it going forward into the next 12 to 18 months?
Jaiyeola Dauda Exactly what Christian said; we will be part of a solution across all markets. In Africa, where we have close to 91 banks across almost 30 countries, one of the most important things we have recognized is it’s not a one-size-fits-all across the region. One thing that we have done consistently is to look at the changing demand from our clients. And so instead of asking for plain vanilla products in good times, our banks are asking for products that are not plain vanilla, and so we as a bank are poised to react to that, particularly when it comes to FX liquidity, when it comes to the channels of transaction, we have been quite sensitive to that and we’ve actively engaged with our banks and see where we can add some form of support or value to their business. And that has been ongoing.
Clarissa Dann Jaiyeola and Rebecca, thank you so much for coming into the virtual studio today and sharing your thoughts. We’ve got a lot to think about and I’m quietly confident the sub-Saharan Africa will not only deal with this pandemic, but come out of it rather well, so thank you.
Dr. Rebecca Harding Thank you.
Jaiyeola Dauda Thank you very much.
Clarissa Dann I’d like to thank Jay and Rebecca for their insights on sub-Saharan Africa. And I’d also like to thank all of you for watching Trade Finance TV today. For further episodes visit TRADEFINANCETV.NET.