Covid-19 is exacerbating the global trade finance gap

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.

World Bank predicts sharpest decline of remittances

Global remittances are projected to decline sharply by about 20 per cent in 2020 due to the economic crisis induced by the Covid-19 pandemic and shutdown.

The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country. Remittances to low and middle-income countries (LMICs) are projected to fall by 19.7 per cent to $445 billion, representing a loss of a crucial financing lifeline for many vulnerable households.

Studies show that remittances alleviate poverty in lower- and middle-income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labour in disadvantaged households. A fall in remittances affect families’ ability to spend on these areas as more of their finances will be directed to solve food shortages and immediate livelihoods needs.

“Remittances are a vital source of income for developing countries,” World Bank Group president David Malpass said, adding that the ongoing economic recession caused by Covid-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies. “Remittances help families afford food, healthcare, and basic needs.”

As the World Bank Group implements fast, broad action to support countries, we are working to keep remittance channels open and safeguard the poorest communities’ access to these most basic needs, he adds.

The World Bank is assisting member states in monitoring the flow of remittances through various channels, the costs and convenience of sending money, and regulations to protect financial integrity that affect remittance flows. It is working with the G20 countries and the global community to reduce remittance costs and improve financial inclusion for the poor.

Remittance flows are expected to fall across all World Bank Group regions, most notably in Europe and Central Asia (27.5 per cent), followed by Sub-Saharan Africa (23.1 per cent), South Asia (22.1 per cent), the Middle East and North Africa (19.6 per cent), Latin America and the Caribbean (19.3 per cent), and East Asia and the Pacific (13 per cent).

The large decline in remittances flows in 2020 comes after remittances to LMICs reached a record $554 billion in 2019. Even with the decline, remittance flows are expected to become even more important as a source of external financing for LMICs as the fall in foreign direct investment is expected to be larger (more than 35 per cent). In 2019, remittance flows to LMICs became larger than FDI, an important milestone for monitoring resource flows to developing countries.

In 2021, the World Bank estimates that remittances to LMICs will recover and rise by 5.6 per cent to $470 billion. The outlook for remittance remains as uncertain as the impact of Covid-19 on the outlook for global growth and on the measures to restrain the spread of the disease. In the past, remittances have been counter-cyclical, where workers send more money home in times of crisis and hardship back home. This time, however, the pandemic has affected all countries, creating additional uncertainties.

“Effective social protection systems are crucial to safeguarding the poor and vulnerable during this crisis in both developing countries as well as advanced countries,” global director of the Social Protection and Jobs Global Practice at the World Bank Michal Rutkowski said. “In host countries, social protection interventions should also support migrant populations.”

The global average cost of sending $200 remains high at 6.8 per cent in the first quarter of 2020, only slightly below the previous year. Sub-Saharan Africa continued to have the highest average cost, at about 9 per cent, yet intra-regional migrants in Sub-Saharan Africa comprise over two-thirds of all international migration from the region.

“Quick actions that make it easier to send and receive remittances can provide much-needed support to the lives of migrants and their families,” lead author of the Brief and head of KNOMAD Dilip Ratha said, adding that these include treating remittance services as essential and making them more accessible to migrants.

Remittance flows to the East Asia and Pacific region grew by 2.6 per cent to $147 billion in 2019, about 4.3 percentage points lower than the growth rate in 2018. In 2020, remittance flows are expected to decline by 13 per cent. The slowdown is expected to be driven by declining inflows from the United States, the largest source of remittances to the region. Several remittance-dependent countries such as those in the Pacific Islands could see households at risk as remittance incomes decline over this period. A recovery of 7.5 per cent growth for the region is anticipated in 2021.

Likewise, the average cost of sending $200 to the East Asia and Pacific region dropped to 7.13 per cent in the first quarter of 2020, compared to the same quarter in 2019. The five lowest cost corridors in the region averaged 2.6 per cent while the five highest cost corridors averaged 15.4 per cent as of 2019 fourth quarter.

Remittances to countries in Europe and Central Asia remained strong in 2019, growing by about 6 per cent to $65 billion in 2019. Ukraine remained the largest recipient of remittances in the region, receiving a record high of nearly $16 billion in 2019. Smaller remittance-dependent economies in the region, such as Kyrgyz Republic, Tajikistan, and Uzbekistan, particularly benefited from rebound of economic activity in Russia. In 2020, remittances are estimated to fall by about 28 per cent due to the combined effect of the global coronavirus pandemic and lower oil prices.

Similarly the average cost of sending $200 to the ECA region declined modestly to 6.48 per cent in the first quarter of 2020 from 6.67 per cent a year earlier. The differences in costs across corridors in the region are substantial; the highest costs for sending remittances were from Turkey to Bulgaria, while the lowest costs for sending remittances were from Russia to Azerbaijan.

Remittances to South Asia are projected to decline by 22 per cent to $109 billion in 2020, following the growth of 6.1 per cent in 2019. The deceleration in remittances to the South Asian region in 2020 is driven by the global economic slowdown due to the coronavirus outbreak as well as oil price declines. The economic slowdown is likely to directly affect remittance outflows from the United States, the United Kingdom, and EU countries to South Asia. Falling oil prices will affect remittance outflows from GCC countries and Malaysia. Remittance costs: South Asia had the lowest average remittance costs of any region, at 4.95 per cent. Some of the lowest-cost corridors had costs below the 3 per cent SDG target. This is probably due to high volumes, competitive markets, and deployment of technology. But costs are well over 10 per cent in the highest-cost corridors due to low volumes, little competition, and regulatory concerns. Banking regulations related to AML/CFT raise the risk profile of remittance service providers and thereby increase costs for some receiving countries such as Afghanistan and sending countries such as Pakistan.

Masatsugu Asakawa elected ADB President

Masatsugu Asakawa has been unanimously elected President of the Asian Development Bank (ADB) by its Board of Governors. Asakawa, 61, currently special advisor to Japan’s Prime Minister and Minister of Finance, will assume office as ADB's 10th President on January 17, 2020. He will succeed Takehiko Nakao, who will leave office on January 16, 2020. Asakawa will finish the unexpired term of President Nakao, which ends on November 23, 2021.
“Asakawa’s extensive and diverse experience in international finance and development will serve ADB well in pursuing its vision of a prosperous, inclusive, resilient, and sustainable Asia and the Pacific,” said deputy prime minister and minister of Economy and Finance of the Republic of Korea and chair of the ADB Board of Governors Hong Nam-Ki. “The ADB Board of Governors looks forward to working with Asakawa.”
In a career spanning close to four decades, Asakawa has held a range of senior positions at the Ministry of Finance of Japan, including vice minister of Finance for International Affairs, and gained diverse professional experience in development policy, foreign exchange markets, and international tax policy.
He served as finance deputy for the 2019 G20 Osaka Summit and the G20 Finance Ministers and Central Bank Governors meeting in Fukuoka, Japan. Furthermore, in the immediate aftermath of the Global Financial Crisis, he took part in the first G20 Leaders’ Summit Meeting in his capacity as executive assistant to the then Prime Minister Taro Aso. Asakawa has had frequent engagement with the Organisation for Economic Co-operation and Development (OECD), including as chair of the Committee on Fiscal Affairs from 2011 to 2016.
Asakawa served as a visiting professor at the University of Tokyo from 2012 to 2015 and at Saitama University from 2006 to 2009. He obtained his Bachelor of Arts from the University of Tokyo in 1981 and MPA from Princeton University in 1985.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty, it claims in a press note. “In 2018, it made commitments of new loans and grants amounting to $21.6 billion.”
Established in 1966, it is owned by 68 members, 49 from the region.