The gap in global trade finance has broadened to an unprecedented $2.5 trillion in 2022, a marked increase from $1.7 trillion in 2020. This development comes as a result of surging interest rates, uncertain economic outlooks, inflation, and geopolitical instability, which have inhibited banks' capacity to facilitate trade financing, according to the 2023 Trade Finance Gaps, Growth, and Jobs survey by the Asian Development Bank (ADB).
Trade Finance and Global Exports
In the aftermath of the COVID-19 pandemic, global goods exports saw an impressive rise—26.6% in 2021 and 11.5% in 2022. Despite this post-pandemic revival, the survey found a noticeable deceleration in the growth of global trade exports, with a 3% decline recorded as of April 2023, following a stagnant growth in the last quarter of 2022.
Barriers to Financing
"The burgeoning trade finance gap is increasingly crippling the ability of trade to stimulate human and economic development through job creation and growth," commented Suzanne Gaboury, Director General for Private Sector Operations at ADB.
The survey pointed out that geopolitical events, like Russia's invasion of Ukraine, have adversely influenced the trade finance portfolios of approximately 60% of the banks surveyed, mainly due to rising uncertainties and commodity prices.
Supply Chain Challenges
Businesses polled in the survey cited insufficient funding as the most formidable challenge in maintaining resilient supply chains. The study outlined easy access to adequate financing, competent logistics, and the integration of digital technologies as key elements for strong supply chains.
Application Rejections
The survey revealed that nearly 20% of the banks had declined some trade finance applications. Rejection grounds encompassed perceived high country risk, insufficient collateral, inadequate documentation, and compliance issues related to "know-your-customer" protocols.
Solutions and Recommendations
The report recommends the promotion of trade finance as an investable asset class and advocates for more engagement from alternative financiers and multilateral development banks. "An emphasis on trade financing as an effective crisis response mechanism can offer immediate liquidity to countries in economic distress, fostering stability and long-term recovery," the report suggests.
Focusing on ESG and Digitalization
Uniquely, the 2023 trade deficit study also looked at the influence of environmental, social, and governance (ESG) factors on trade finance. A significant percentage of respondents believe that aligning with ESG principles could potentially serve as a solution to the trade financing deficit.
The rising trade finance gap is not just a number; it represents missed opportunities for growth, job creation, and global economic stability. "Multiple stakeholders, including banks and policymakers, have a role to play in bridging this gap for a more prosperous and stable international trading system," concludes the report.
