Trade finance: The global trade finance gap surged to a record $2.5 trillion in 2022 from $1.7 trillion two years earlier on the back of rising interest rates, flagging economic prospects, inflation, and geopolitical volatility reducing the capacity of banks to deliver trade financing, said the latest survey by Asian Development Bank (ADB) on Tuesday. The trade finance gap refers to the difference between the money businesses need for international trade and the money they can actually get from banks and other financial sources. This gap could be a barrier for businesses, especially small ones, trying to expand into global markets.
“That growing gap strangles the potential of trade to deliver critical human and economic development through jobs and growth,” said ADB’s Director General for Private Sector Operations Suzanne Gaboury.
The 2023 Trade Finance Gaps, Growth and Jobs Survey noted that the demand for trade finance surged on the back of a sharp recovery in global goods exports which grew in 2021 and 2022 at 26.6% and 11.5%, respectively, after the pandemic. However, the heightened economic risks made finance more difficult to secure than before.
After a zero-growth rate during the last quarter of 2022, as of April 2023, global trade exports in value slowed year-to-date, showing a decline of around 3 per cent, the survey said.
The survey included data from 137 banks and 185 companies from around 50 countries. Respondents noted that they faced continued constraints in 2022 due to rising interest rates and financial market uncertainties, set against the backdrop of a global economic slowdown, and geopolitical instability.
The 2023 survey focused on environmental, social, and governance (ESG) issues, along with digitalization in order to know their impact on relevant supply chains and the trade finance gap. The survey noted that the majority of banks and companies in the survey believed that ESG alignment could potentially help reduce the trade financing gap.
The leading supply chain challenge according to firms surveyed was insufficient financing while adequate financing, reliable logistics, and the use of digital technology were the three most important components of resilient supply chains, according to them.
Also read: MSME ministry invites tender to study export issues faced by MSMEs
In India, the MSME ministry in March this year invited online tender for carrying out a six-month study on the MSME sector’s exports and how to enhance and diversify its role in the global value chain. According to the tender document issued on February 22, the MSME sector is faced with several export challenges such as the lack of awareness around products in demand, export promotion and assistance schemes, legal framework, IPR issues; lack of access to affordable trade finance, etc.
Importantly, the share of export of MSME-specified products in all India exports continued to decline to 43.6 per cent in FY23 from 45.03 per cent share in FY22, 49.35 per cent in FY21 and 49.77 per cent in FY20. However, the value of MSME exports had increased to $190 billion in FY22 from $143.9 billion in FY21 and $154.8 billion in FY20.