The Covid-19 pandemic is a tragic health crisis causing irreversible damage to the global economic and financial system. It is also worsening trade restrictions and reducing trade volumes globally. Coupled with the scarcity of financing in general, and trade financing in specific, coronavirus is causing serious damage to developing economies, according to the global trade body.
The least developed countries (LDCs) are among the hardest hit. Their already fragile economies are facing further challenges, as the value of their exports plummet and their borders are closed to trade and tourism, like most countries worldwide. “Local and foreign investments are drying up,” the World Trade Organisation (WTO) said, adding that small business revenues and orders have been reduced drastically. “The cost of financial transactions is increasing, as working with financial institutions in LDCs is perceived to be riskier than before.”
The issuance of letters of credit and other trade finance instruments is becoming difficult, if available at all, and the appetite of correspondent banking is decreasing each day as the crisis unfolds. Because of this, LDCs are seeing a rapid depletion of their foreign reserves, and their financial institutions are facing a shortage of liquidity. The persistence of this situation could lead LDCs to drift further away from global value chains and to be left out of the international trade system, it added.
Access to trade finance was already an issue prior to the pandemic. The global trade finance gap is estimated at $1.5 trillion and it is mostly impacting small and medium-sized enterprises in developing countries. Over 50 per cent of requests for financial support to trade are rejected.
The actions that were being taken to reduce the global trade finance gap – including policy advancement, technical assistance, capacity building, regulatory reform and increased financing – are more important now than ever before, to ensure that the world’s most vulnerable countries are not further entrenched in economic inequality because of the pandemic.
Multilateral development banks (MDBs) have launched immediate responses and financial support amounting to more than $200 billion for emerging and low-income countries. For instance, the Islamic Development Bank Group has launched an initial 3Rs, as in ‘Respond, Restore, Restart’, for a total $2.3 billion to support Organisation of Islamic Conference (OIC) countries at different stages of the recovery trajectory. More specifically, trade finance is a pivotal component of support to the private sector as acknowledged by the G20 Ministers of Finance and Central Bank Governors at their April 2020 meeting.
In addition the WTO and MDBs committed to support trade finance The International Islamic Trade Finance Cooperation (ITFC) has pledged an initial $300 million response package to support strategic health, food and energy trade flows and further grant elements to build the capacity of medical personnel and laboratories in OIC countries.
In addition to finance itself, technical assistance programmes are enabling LDCs to build their capacity to provide trade finance. For example, a successfully piloted international trade e-learning programme developed by ITFC and the International Chamber of Commerce is now being provided digitally to financial institutions in LDCs, with the support of the Enhanced Integrated Framework (EIF) and several multilateral development banks and major commercial banks. MDBs are also working together to overcome trade finance barriers, including compliance challenges.
The least developed countries (LDCs) are among the hardest hit. Their already fragile economies are facing further challenges, as the value of their exports plummet and their borders are closed to trade and tourism, like most countries worldwide. “Local and foreign investments are drying up,” the World Trade Organisation (WTO) said, adding that small business revenues and orders have been reduced drastically. “The cost of financial transactions is increasing, as working with financial institutions in LDCs is perceived to be riskier than before.”
The issuance of letters of credit and other trade finance instruments is becoming difficult, if available at all, and the appetite of correspondent banking is decreasing each day as the crisis unfolds. Because of this, LDCs are seeing a rapid depletion of their foreign reserves, and their financial institutions are facing a shortage of liquidity. The persistence of this situation could lead LDCs to drift further away from global value chains and to be left out of the international trade system, it added.
Access to trade finance was already an issue prior to the pandemic. The global trade finance gap is estimated at $1.5 trillion and it is mostly impacting small and medium-sized enterprises in developing countries. Over 50 per cent of requests for financial support to trade are rejected.
The actions that were being taken to reduce the global trade finance gap – including policy advancement, technical assistance, capacity building, regulatory reform and increased financing – are more important now than ever before, to ensure that the world’s most vulnerable countries are not further entrenched in economic inequality because of the pandemic.
Multilateral development banks (MDBs) have launched immediate responses and financial support amounting to more than $200 billion for emerging and low-income countries. For instance, the Islamic Development Bank Group has launched an initial 3Rs, as in ‘Respond, Restore, Restart’, for a total $2.3 billion to support Organisation of Islamic Conference (OIC) countries at different stages of the recovery trajectory. More specifically, trade finance is a pivotal component of support to the private sector as acknowledged by the G20 Ministers of Finance and Central Bank Governors at their April 2020 meeting.
In addition the WTO and MDBs committed to support trade finance The International Islamic Trade Finance Cooperation (ITFC) has pledged an initial $300 million response package to support strategic health, food and energy trade flows and further grant elements to build the capacity of medical personnel and laboratories in OIC countries.
In addition to finance itself, technical assistance programmes are enabling LDCs to build their capacity to provide trade finance. For example, a successfully piloted international trade e-learning programme developed by ITFC and the International Chamber of Commerce is now being provided digitally to financial institutions in LDCs, with the support of the Enhanced Integrated Framework (EIF) and several multilateral development banks and major commercial banks. MDBs are also working together to overcome trade finance barriers, including compliance challenges.
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