IFC | WTO

WTO, IFC heads agree to enhance cooperation on trade finance

WTO Director-General Ngozi Okonjo Iweala and International Finance Corporation (IFC) Managing Director Makhtar Diop agreed on 29 November to enhance cooperation between the two organizations in order to explore ways to improve the availability of trade financing for regions in need.

 

In a joint statement, the two pledged to enhance existing cooperation to improve the analytics, identification and detection of trade finance gaps in order to better direct capacity building and other resources where unmet demand is greatest, particularly in Africa.

“Our developing country members regularly identify a lack of trade finance as a major obstacle to participating in global trade — all the more so for micro, small and medium-sized enterprises, and businesses led by women,” DG Okonjo-Iweala said. “Working together, experts from our two organizations will be able to better analyse, detect and explain trade finance gaps, with a view to directing finite resources where they are needed the most. I believe that a significant share of trade finance gaps results from knowledge gaps.”

“Trade is the lifeblood of the global economy but without trade finance, there can be no effective trade,” said the IFC’s Managing Director, Makhtar Diop. “By expanding our knowledge of trade finance gaps and bolstering traders’ capacity, IFC and the WTO can help small enterprises in developing countries integrate into the global economy.”

Most trade is not paid cash-in-advance. The short-term payment risk involved in international trade is mitigated by a credit, guarantee or credit insurance, present in up to 80% of global trade transactions. The sum of these facilities provided by financial and other institutions is known as trade finance.

In their joint statement, the WTO and the IFC heads agreed to work with small traders and financial institutions at the local level to better understand the ecosystem of trade finance. They also pledged to improve access to trade finance training programmes in emerging markets, mainly in Africa.

They agreed to strengthen the ability of local financial institutions to meet compliance challenges and to facilitate knowledge and awareness for exporters and importers of trade finance support available from development financial institutions. In addition to the IFC, examples of such institutions include the Asian Development Bank, the African Development Bank, the Inter-American Development Bank and the European Bank for Reconstruction and Development.

The IFC — a member of the World Bank Group — is the largest global development institution focused on the private sector in emerging markets.

The full text of the joint statement is below.

Joint IFC-WTO Statement on Enhanced Cooperation to Strengthen Access to Trade Finance

Trade would not happen without trade finance. Yet, in many developing countries, increased trade finance costs during the pandemic are adding to the already high cost of physically moving critical goods and commodities across borders. Trade costs in Africa, for example, can be as high as 300 percent of the value of the merchandise being traded. Meanwhile, the cost of trade finance, for example confirmed letters of credit, has increased during the pandemic and is six to seven times more expensive in Africa than in OECD countries.

Basic trade finance lines are not even available locally in emerging markets, particularly for SMEs. Surveys indicate that over 40 percent of SMEs’ trade finance requests are rejected. This number goes up to 70 percent when the requests emanate from women-owned SMEs. And when trade finance requests are accepted, often the most expensive form of trade finance is proposed — collateralized working capital financing at very high rates. In this context, it is no surprise that global trade finance gaps, mainly in developing countries, have increased during the pandemic, reaching $1.7 trillion.

IFC and the WTO will enhance their cooperation, in order to improve the analytics and understanding of trade finance gaps (better survey, identify, and detect gaps), so as better direct limited resources while strengthening the capacity of local exporters and importers and financial institutions where unmet demand is acute:

  1. Trade Finance Gap Study

The WTO and IFC will work together to improve the identification of trade finance gaps, notably in Africa, where the gaps are considerably high. Improved country-focused surveys will help target priority markets in which the mismatch between supply and demand is particularly high and will help IFC implement the $1 billion Africa Trade Recovery Initiative launched in May 2021.

  1. Improving the Diagnostic of Local Trade Finance Impediments

IFC and the WTO will work with small traders and financial institutions at the local level to better understand the ecosystem of trade finance. With this data, we will be able to maximize the impact of our partnership to address these challenges. Small traders and financial institutions will be surveyed in the context of existing mechanisms, such as the WTO’s Enhanced Integrated Framework and IFC’s annual client survey.

  1. Strengthening Trade Finance Training Programs for SME Exporters and Importers

Trade finance training programs for SMEs have seen considerable interest in low-income, fragile, and vulnerable economies where companies are subject to the highest rejection rates. To further support SME exporters and importers that are suffering from disrupted supply chains caused by the pandemic, IFC has launched pilot trade finance training programs for SMEs. Building on programs already underway, IFC and the WTO will work mainly in Africa to improve access to trade finance training programs in emerging markets.

  1. Strengthening Local Financial Institutions’ Capacity to Meet Compliance Challenges

Meeting transparency standards, such as being able to detect Trade Based Money Laundering (TBML), is key to maintaining trade and financial relations in global markets, notably through Correspondent Banking Relationships (CBRs). IFC and the WTO will expand training and capacity-building programs, mainly targeting Africa, to help emerging market financial institutions meet compliance challenges.

  1. Sharing Knowledge and Raising Awareness of Trade Finance Support Programs

The global pandemic has had a disproportionate impact in emerging markets, limiting access to trade finance. While the demand for trade finance support from Development Financial Institutions (DFIs) is high, these programs are not always well known by the trading community. IFC and the WTO will launch a joint research initiative by facilitating workshops for exporters and importers to identify the level of awareness of DFIs’ trade finance support programs. This will help develop solutions to address the trade finance “information gap.”

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