27 May 2009
World Bank, G20 Get Trade Finance Flowing in Developing Countries
Washington — Developing countries’ trade, already hurt by the global economic slowdown, has been hammered further by the reduced availability of trade finance, a problem that the World Bank Group, supported by the Group of 20 industrialized nations, is acting to address.
A World Bank affiliate, the International Finance Corporation (IFC), has launched the Global Trade Liquidity Program that will work through commercial banks to make trade finance more available in developing countries.
“We’ve just had an extraordinary drying up of liquidity in the marketplace, and this is a way to try to mobilize some public sector resources so that we could get some private sector money moving again to help with trade finance,” said E. Whitney Debevoise, the U.S. executive director at the World Bank.
World trade, which grew at double-digit rates in most major economies for much of 2008, began to decline sharply in all regions starting around September 2008. World trade dropped by 12 percent in the last three months of 2008, according to the World Trade Organization (WTO), which forecasts a 9 percent decline in trade for 2009, the largest annual contraction since World War II.
Trade finance, which assures the orderly payment and delivery of goods, is provided in many ways, depending on the needs of the exporter and importer. Trade finance can be structured to cover a wide range of costs necessary to get the goods to the buyer, including providing working capital to cover labor and other expenses required to complete the transaction.
When financial markets start to freeze up, trade finance is the first type of financing to disappear, said German Vegarra, senior manager for global financial markets at the IFC. In the current crisis, many banks have reduced or suspended their trade finance business, he said, which hurts developing countries the most since they are often more dependent on exporting commodities and assembled products than are developed economies. The trade finance shortage for developing countries is in the range of $100 billion to $300 billion, Vegarra said, citing a WTO estimate.
With the new program, the IFC will work directly with commercial banks, providing them with liquidity — readily available cash — that will enable them to provide trade finance to their clients in developing countries. “The banks are basically our partners where we are coming together with liquidity and we are using their existing channels to help several emerging markets at once,” Vegarra said.
In the trade liquidity program, commercial banks put up 60 percent of the funding and the IFC provides 40 percent. The “risk sharing” on the part of the private banks and the IFC is one of the major innovations of the program, Debevoise said.
World Bank President Robert Zoellick reached agreements on April 2 with the first two commercial banks that will participate in the program, Standard Chartered Bank, a global British bank, and Standard Bank of South Africa. The program’s assistance will increase these banks’ liquidity and their ability to support more trade finance transactions. Standard Chartered Bank initially will receive $500 million and Standard Bank $400 million, according to an IFC press release. There have been talks with other private banks about participating in the program, Vegarra said, including Rabobank of the Netherlands and Citibank.
The Global Trade Liquidity Program will be a three-year initiative, Vegarra said. The time limit is based on the experience with the financial crises in Asia in the late 1990s and in Argentina. “There is an immediate need for liquidity that appears, a very strong need, but it also disappears very quickly,” Vegarra said. As markets recover and more private banks become comfortable in taking risks and putting liquidity in the market, the program no longer will be needed, he said.
The G20 members and international financial institutions will provide $5 billion in funding for the program, which will be leveraged to make available $50 billion in assistance, Vegarra said. The contributions so far are: from the IFC, $1 billion; China, $1.5 billion; Britain, approximately $447 million; Canada, $200 million; and the Netherlands, $50 million, according to the IFC.
The communiqué issued after the April G20 Summit in London calls on members to “assure availability of at least $250 billion over the next two years to support trade finance” through the member countries’ export credit and investment agencies and the multilateral development banks. The IFC program accounts for $50 billion of that total, Vegarra said.
The IFC and two regional developments banks already have trade finance assistance programs, mostly providing guarantees that cover the risk of nonpayment for individual transactions. The IFC has a $3 billion program that provides these kinds of guarantees. The Asian Development Bank and the Inter-American Development Bank also have guarantee programs. Both recently increased funding for their programs to $1 billion.
The U.S. government provides trade finance insurance, loans, guarantees and other assistance through programs managed by the Export Import Bank of the United States, the Small Business Administration and U.S. Department of Agriculture.
