The Key To Unlocking The Benefits Of Trade

(MENAFN- Gulf Times) supply chains form the backbone of international commerce, representing over half the value of global merchandise trade. They also create large numbers of jobs and lower the bar for countries and companies to participate in the world economy. But the finance underpinning supply chains is inadequate, leaving too many small businesses in emerging and developing economies cut off from the benefits of global trade.
Supply-chain networks bring together raw materials, parts, services, and other inputs from multiple countries. The firms within these networks depend on short-term supply-chain finance to avoid being squeezed between upfront payments to their suppliers and late payments by their buyers. Such financing enables a large share of global trade, and for small firms in developing countries, it is essential.
At the global level, supply-chain finance is one of the fastest growing segments of trade finance, with BCR's World Supply Chain Finance Report 2024 estimating its value at around $2.3tn. But only some are benefiting from this expansion. While large multinational corporations and developed economies have seamlessly integrated supply-chain finance into their procurement networks, most businesses in developing countries remain on the sidelines.
For these firms – most of which are micro, small, and medium-size enterprises (MSMEs) – securing supply-chain finance from local banks is a significant challenge, owing to weak legal frameworks, inadequate technological infrastructure, and prohibitively high costs. This limits many firms' ability to grow and thrive, and their countries cannot reap the full benefits of global trade.
Data from joint trade-finance surveys conducted by the International Finance Corporation and the World Trade Organisation illustrate the extent of the problem. Even in countries like Vietnam and Cambodia – where many small firms have managed to tap into supply chains in sectors like textiles and consumer electronics despite operating primarily on a cash basis – shortages of supply-chain finance are causing economic harm.
Although 50% of these countries' trade is supply-chain related, only 0.5% of their trade is supported by supply-chain finance from local financial institutions. As a result, local firms not only face constant financial pressure and higher exit rates; they also are unable to generate the investment resources that are so important for moving up the value chain.
The benefits that would come from increasing supply-chain finance in developing economies are substantial. WTO research shows that a 10% increase in the use of international factoring (the main type of supply-chain finance, used primarily by MSMEs to secure immediate cash against their unpaid outstanding invoices) can boost countries' trade by 1%.
Expanding access to supply-chain-finance tools also could significantly increase participation in trade, especially by MSMEs in developing countries. And that, in turn, would help raise incomes, reduce poverty, and foster greater financial inclusion.
For their part, multilateral development banks can do much more to catalyse supply-chain finance in developing countries. Multilateral lenders must commit to co-ordinating their efforts with governments, industry associations, and local and international financial institutions.
Such collaboration could advance multiple objectives. First, it could strengthen the legal frameworks for supply-chain finance where they are weak or non-existent, as well as building greater capacity among regulators and policymakers.
Second, by training market participants and regulators in global best practices, international organisations can help standardise credit data reporting, solvency rules, and enforcement mechanisms. Third, they can promote digitalisation by supporting the development of essential technological infrastructure. And fourth, they can provide financing and technical assistance to banks and other providers of supply-chain finance in emerging markets, which will increase product availability.
By working together, multilateral organisations, governments, and financial institutions can unlock the full potential of supply-chain finance, thus promoting trade and financial inclusion in the world's most underserved regions. When it comes to driving development, increasing supply-chain finance is low-hanging fruit. Given its significant potential to deliver gains for employment, trade, and growth, plucking it could advance a broad range of global development objectives. - Project Syndicate

MENAFN23102024000067011011ID1108813718