Food Emergency Contingent Financing Facility (FECONTRAF)
The Food Emergency Contingent Trade Financing Facility (FECONTRAF) enables physical food (grains) reserves to be substituted with a standby facility allowing vulnerable African countries to finance the commercial imports of grains, or their staple food of choice, if they have a food emergency. It will guarantee the availability of an import financing facility in the event of a crisis when access to trade finance markets may be more stringent for the country.
The Benefits of the Food Emergency Contingent Trade Financing Facility (FECONTRAF):
- It will act as a substitute to the physical food stock, thereby reducing the cost of keeping and maintaining a high level of physical reserves for vulnerable countries;
- It would make it possible for the Afreximbank member countries which are currently unable to maintain their desired food reserve levels due to fiscal and current account constraints, to do so with the attendant benefits;
- It will help budgeting and impose some fiscal discipline especially when it is tied to mandatory annual cash deposits to be saved in good crop years;
- It will help alleviate the weather-induced food shortages, hunger, which can cause death among the most vulnerable groups and therefore contributes to improving health and well-being;
- It will elevate the relevance of Afreximbank globally, and amongst its member states, and it will enhance the support it can receive from members including the potential of increased equity and deposit mobilization; and
- It can be a low-risk source of annuity income and can create captive trade finance business for the Bank.
Facilities offered under FECONTRAF
1. Stand-by Letter of Credit (SBLC)
This facility is available through of a Stand-by Letter of Credit (SBLC) which is drawn on the occurrence of certain trigger events related to the affected country’s weather and crop yields. Drawings under the SBLC can be by an Import Letter of Credit, or by direct advances to the food suppliers for delivery to the affected country. The product has commodity options as a useful instrument for guaranteeing that the desired quantity of relevant food is imported.
2. Food Emergency Reserve Account
The Food Emergency Reserve Account is an optional value-add service through which vulnerable countries are encouraged to maintain an account with the Bank to build up some reserve funds in their account in good crop years, on a yearly basis. Part of these funds would have been used to purchase grain reserves. When a food emergency occurs, subscribers can use both the SBLC and the funds in this account. The funds can also be used to cash collateralise the import financing thus reducing the financing costs.
Main Elements of FECONTRAF
- The relevant Ministries and/or Agencies of the member countries’ Governments, supported by their central banks; and
- The UN World Food Program and non-governmental organizations with programs targeted at the African countries.
Key features including delivery channel
- The facility is initially available through a Stand-by Letter of Credit (SBLC) to be drawn in the event of weather- driven and crop yield contingencies;
- In the event of an agreed contingency trigger occurring, the SBLC is relayed into an Import Letter of Credit, or direct advances to food suppliers (the “Relay Facility”). The Relay is also contingent on receiving an amount of up to 30% of the import financing amount in the cash collateral account;
- The facility also incorporates a value-added option that guarantees the supply of an agreed quantity of food, irrespective of market prices, on the occurrence of the contingent trigger (the “Optional Facility”);
- Through the FECONTRAF, the Bank can grant contingent financing up to an agreed amount, equivalent to the cost of stocking the physical reserve target (in metric tons), of a borrowing member country, or any specific metric ton amounts, whichever is less; and
- An early warning and vulnerability assessment system (which is managed by RICO) to enable liquidity reserve management.
Trigger for a Call on the Stand-by Letter of Credit (SBLC) and Activation of the Relay facility (the Import Financing facility):
The SBLC can be called, and the Relay facility activated, upon the simultaneous occurrence of the following contingency triggers:
- Occurrence of bad weather, to be defined and agreed between the Bank and the country;
- Poor crop yield, to be defined and agreed between the Bank and the country; and
- Payment of up to 30% of the import into a cash collateral Account.
Sources of Repayment
In the event of a call on the SBLC and the implementation of the relay facility, the sources of repayment can include:
- Assigned identified cashflow such as mining royalties, identified export proceeds from sales of commodities such as crude oil, iron ore, copper or gold, and/or local sales proceeds (if applicable);
- Government guarantee, guarantee from the Central Bank, Promissory Notes or bills avalized by the Central Bank;
- Donor-backed support: Assignment of the funds by donor support (cash aid) to Afreximbank directly;
- Debiting the cash collateral account; and
- Direct from the Government, or from other beneficiaries such as WFP, NGOs
Facilities are secured on one, or a combination of, the following;
- Cash in the cash collateral account (beneficiary countries are required to maintain such an account and fund it with up to 30% of the facility amount during good crop years, or prior to a Relay trigger;
- Assignment of the identified export receivables;
- Assignment of the local sales proceeds (where applicable); and
- Acceptable guarantees (from bank, WFP, NGO etc.).
Each facility has a final maturity term of up to four years:
- The Stand-by Letter of Credit (SBLC) expiry will not exceed two years; and
- The Relay (Import Facility) operates on a revolving basis with final maturity not beyond 24 months after any call on the SBLC.
Pricing (if applicable)
Pricing will be assessed on a case-by-case basis, and is based on Afreximbank’s pricing model, which takes account of the transaction risks, the market and the member country’s operations.
- A Stand-by Letter of Credit fee on terms similar to the prevailing market conditions;
- The import financing (Relay) facility will attract a Letter of Credit fee;
- An interest rate upon disbursement; and
- The entire facility will also attract an arrangement fee.
FECONTRAF is a contingent facility, and therefore has less impact on capital use. The use of a Stand-by Letter of Credit (SBLC) reduces capital consumption to 20%.
However, the exposures attract higher capital consumption when the SBLC is called and the relay facility is drawn. To manage the capital use and the country limits, the Bank may purchase weather insurance from A-rated credit insurers.
- The standby facility provides a guarantee that grains can be imported and supplied in order to deal with food emergencies thereby averting social and/or economic dislocations in vulnerable African countries;
- The facility facilitates development of cost-efficient and regionally strategic grain reserves by private sector players, thereby increasing intra-African trade and development;
- The facility supports the emergency relief assistance and is aimed at restoring a degree of normalcy, both social and economically in the lives of affected populations of member countries, as quickly as possible. This fast recovery helps spur the quicker return of economic activity in the member countries affected;
- It enables governments to redirect scarce financial resources towards their priority development programs, rather than spending it on recurrent costs for managing their strategic reserves, which are plagued by cost inefficiencies; and
- Rapid increases in population are in some cases outpacing food production. The facility provides a solution for governments to address food shortages, in an era of increasingly adverse impacts of weather-induced food shortages in affected countries.
Benefits to Subscribing Country
Stability of Socio-Political Environment: FECONTRAF helps deliver socio-political stability to subscribing countries as it guarantees the timely availability of needed food.
The product is expected to convert the usually relatively large capital outlay of maintaining food reserves to a periodic payment of a fixed commitment fee which is significantly less than the costs of setting up and maintaining physical grain reserves. These cost savings can be diverted to other priority and development projects in the country.
Ease Budgetary Pressure
Budgetary pressure is created by the fiscal cost of maintaining food (grain) reserves:
- FECONTRAF provides relief to this budgeting pressure and encourages fiscal discipline, especially when it is tied to mandatory annual cash deposits to be saved in good crop years.
Ease Current Account/Foreign Reserve Pressure:
- Given that many African countries are net importers of food, maintaining physical grains reserves (and turning them over) may involve higher foreign exchange outlays. Those who do not maintain reserves will require large forex outlays for food imports when emergencies occur. These can put heavy pressures on current account and foreign reserve holdings.
FECONTRAF provides immediate relief from the severe pressures that would otherwise befall countries in such situations.
Greater opportunity for innovative agricultural policies
FECONTRAF provides countries with the assurance of standby capacity for addressing any episodic food shortages. This creates a real opportunity for the authorities to start shifting away from agricultural policies which are solely focused on food security caused by weather events, towards innovative policies promoting high-productivity crop production, such as irrigated sugarcane for human consumption and/or processing into ethanol, and other industrial products.
This has the dual effect of diversifying the economy and increasing employment.
Protection of vulnerable groups
It will help alleviate weather-induced food shortages, hunger, and death amongst the most vulnerable groups and therefore contributes to improving health and well-being. Cataclysmic food crisis which normally result in multitudes of hunger, starvations and deaths are either minimised or averted.