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The International Finance Corporation’s Role in Trade Finance and Development

By Lars H. Thunell, executive vice president and CEO, International Finance Corporation

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To help people escape from the poverty trap, it is essential for IFC and its partners to do all they can to help fill the financial void

Trade is fundamental to economic growth and development. Maintaining emerging market firms’ access to international markets is always important. But in times of economic uncertainty it becomes even more so, helping maintain the momentum in two key drivers of poverty reduction: employment and income gains.

In today’s challenging economic conditions, when 90 million more people are trapped in poverty, many commercial banks have cut back their trade finance for emerging markets. The overall value of the trade finance business has declined in every region since October 2008. Shrinking demand and the financing shortfall have caused a double-digit drop in exports in all regions of the developing world. This makes it essential for the International Financial Corporation (IFC) and its partners to do all they can to help fill the financial void, ‘crowding in’ the private sector with new initiatives designed to support IFC’s larger global vision: to create opportunity for people to escape poverty and improve their lives.

A member of the World Bank Group, IFC is the world’s largest global development finance institution focused on the private sector. In this year of crisis, when investment flows to developing countries have dropped so sharply, the need for the financing and advisory services that IFC provides has never been greater. Trade is now one of IFC’s key focal points, one of the areas where it is responding to the global economic crisis with speed, agility and innovation – helping businesses in developing countries with a broad package of targeted investments and advisory services.

Working in close partnership with others and mobilising resources from many sides, IFC has developed a response package that will support significant amounts of trade during the crisis. It is a sign of today’s record demand for IFC services – demand that is expected to remain strong over the next couple of years, as the world tries to recover from the crisis. There will be even stronger demand post-crisis for private sector financing in IFC’s client countries, especially in low-income countries.

A targeted response

Global trade is expected to decline this year for the first time in decades, dropping by as much as 10 per cent. Reduced lending by banks around the world has created a $300 billion gap in trade finance. That gap poses a special risk to developing countries, which are particularly dependent on trade for economic growth.

IFC responded with a two-part initiative. It expanded its Global Trade Finance Program (GTFP), tripling its size to $3 billion. Providing guarantees for trade transactions in emerging markets, this programme is expected to underpin about $18 billion in additional trade over the next three years.

The GTFP is currently active in 77 countries, and could be expanded to approximately 25 more in the coming year. Its structure allows issuing banks to increase the volume and value of trade transactions, providing enhanced terms and access to competitive pricing terms.

The greatest demand for the programme recently has come from Latin America and the Caribbean. In Panama, Multibank recently became the country’s first issuing bank to join the GTFP, improving access to finance for local importers and exporters and facilitating their entry to new markets. Multibank, which more than doubled its international trade operations in 2008, has now used IFC’s programme in four transactions, totalling $23.4 million, that support international trade in manufactured and consumer goods.

Pakistan has received more than $250 million in GTFP guarantees in the past year. This has expanded access of finance to the country’s corporate sector with a special focus on small and medium enterprises. Provided through eight leading Pakistani banks, this financing supports transactions in agricultural products, oil, iron and other industrial sectors – playing an important role in the broader economy at a critical time. Many other smaller frontier market countries – Armenia and Belarus, Malawi and São Tomé and Príncipe, Afghanistan, Yemen and others – have also benefited by having banks participating in the programme.

However, guarantees alone are not enough to address the gap in trade finance. So IFC helped launch the Global Trade Liquidity Program (GTLP), a unique initiative that brings together governments, development finance institutions and commercial banks to provide trade finance in emerging markets. The GTLP, which began operating in May 2009, initially consists of $5 billion in commitments from governments and other public sector sources, including $1 billion from IFC. It is expected to support $50 billion in trade.

A special feature of the GTLP is that for every 40 cents put up by IFC and public investors, commercial bank partners add 60 cents. Moreover, IFC will execute the programme by working through up to 10 major global and regional banks with extensive trade finance presence in developing countries. Together they have relationships with more than 1,000 smaller corresponding banks in emerging markets. This broad network-based approach gives the GTLP near-universal coverage.

The initial partner banks in the GTLP include Standard Chartered, Standard Bank, Citigroup and Rabobank. IFC has invested $1 billion, and is grateful for additional contributions from the governments of Canada and the Netherlands, the African Development Bank, the United Kingdom’s Department of International Development and CDC Group, the OPEC Fund for International Development, the Saudi Fund for Development, Japan’s Bank for International Cooperation and China’s Ministry of Finance.

Conclusion

IFC is focused both on helping reduce the impact of the crisis on the poor and looking ahead to the post-crisis world. It realises that while official assistance is clearly vital, public sector money alone is not enough to turn the corner. The recovery strategy needs to encourage the role of private business. As the flow of credit resumes, developing countries can become a key force for a larger global rebound.

Over the longer term, today’s high demand for IFC’s private sector financing will likely grow even faster as developing countries account for a larger share of the global economy, public resources remain constrained, and a young and increasingly urban population in poor countries insists on higher-quality health services, education and infrastructure.

There is much to do. IFC can accomplish more working in partnership than alone. It is thus collaborating with the World Bank, the regional development banks and others in coordinated rapid-response initiatives for central and eastern Europe, Africa and Latin America and the Caribbean, in each case drawing from a rich knowledge base that will lead to increased lending and investments.

Trade is just one sector in which IFC has rapidly brought to market such targeted new crisis response initiatives. Others include the IFC Capitalization Fund, the Infrastructure Crisis Facility, the Microfinance Enhancement Facility and expanded Advisory Services. They come as part of a coordinated response to the most challenging economic conditions yet seen.

IFC will continue to adapt to meet these challenges and work toward a world where economic development is sustainable and inclusive.

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