Trade Finance and the Curse of Soft Commodities

There is a fascinating article in this month's Africa Investor on the difficulties many African commodity exporters face in securing sufficient trade finance. The IMF estimates that, as a result of the crisis, there is a trade finance shortfall of $100-$300 billion, with Africa being the most affected by this dearth in funds.

Soft commodity products, such as cocoa and flowers, typically require advance financing to fund cultivation and production, which is repaid once crops are harvested and exported. Most African producers prefer dollar loans, as their costs are primarily denominated in dollars. Yet, because Europe is Africa's largest export market, most export revenues are denominated in pounds and euros. This creates a currency mismatch, which discourages lenders.

The situation is further complicated by an overall shortage of dollars, and Africa's dependence on commodity exports:

Local banks don't have the dollars to finance activity. Even if they provide credit guarantees this is not enough to get business going.

Africa's resource bias doesn't help. Falling commodity prices mean banks have scaled down lending because they believe it will take longer to recover their investment. Banks are also asking for more security in deals, raising fresh problems.

Development banks such as IFC and healthy European banks that avoided the pre-crisis sins of their peers have stepped up their lending. China is also increasing its lending activity in an attempt to revitalize China-Africa trade. Yet, so long as much of Africa's economic growth is led by commodity exports, revenue volatility and economic uncertainty will remain. This will continue to serve as a barrier to accessing credit.

Writing in this blog a few weeks ago, two World Bank trade economists prescribed a ten step solution for G20 leaders to restore the flows of international trade finance. In order to speed up Africa's crisis recovery, these remedies need to be spread beyond the confines of the G20.