RIYADH: The global trade finance deficit increased to a record $2.5 trillion in 2022, up from $1.7 trillion in 2020, as rising interest rates, deteriorating economic forecasts, inflation, and geopolitical unpredictability limited banks’ ability to provide trade financing, according to a survey by the Asian Development Bank.
The 2023 Trade Finance Gaps, Growth, and Jobs survey noted that, following the COVID-19 pandemic, worldwide goods exports increased by 26.6 percent and 11.5 percent in 2021 and 2022, respectively.
Demand for trade finance surged as a result of the quick rebound, but increased economic risks made financing more difficult to obtain, according to the survey.
Despite the post-pandemic resurgence, the global trade environment remains daunting for traders. The survey revealed that global trade exports in value slowed year-to-date, showing a 3 percent decline as of April 2023 after experiencing zero growth in the fourth quarter of 2022.
“The global trade finance funding gap has now widened to well over $2 trillion, as the global economy still struggles to rebound from the pandemic,” said Suzanne Gaboury, director general for private sector operations at ADB.
“That growing gap strangles the potential of trade to deliver critical human and economic development through jobs and growth,” Gaboury added.
The Russian invasion of Ukraine had an impact on the trade finance portfolios of about 60 percent of the surveyed banks, primarily due to heightened geopolitical uncertainties and surging commodity prices.
The survey also highlighted that inadequate funding was identified by polled businesses as the biggest supply chain challenge. They identified easy access to sufficient funding, efficient logistics, and the adoption of digital technologies as the three most critical elements of resilient supply chains.
Approximately 20 percent of banks surveyed stated that some trade finance applications were rejected.
“Reasons for rejection included factors such as perceptions of high country risk, lack of collateral, poorly presented documentation, and issues related to know-your-customer compliance,” stated the report.
The analysis put forward a range of suggestions for how the trade deficit could be closed.
One proposal was to advance the development of trade finance as an investable asset class, including securing the greater involvement of alternative financiers and multilateral development banks.
The report also called for continuation of pushing trade financing as an “effective and proven crisis response mechanism.”
This would enable countries facing economic turmoil and trade finance gaps to deploy liquidity on an urgent basis, to drive economic stability and generate sustainable recovery.
“Banks and other influential stakeholders, including policymakers, can target several areas to help narrow the trade finance gap, and thereby derive greater value, prosperity, and development impact from international trade,” said the report.
The 2023 trade deficit study takes a unique approach by focusing on environmental, social, and governance factors and digitalization, assessing their impact on relevant supply chains and the trade finance shortfall.
A significant portion of the surveyed banks and firms believed that aligning with ESG principles could potentially help alleviate the trade financing deficit.
