Commonwealth Finance Ministers Meeting Washington DC, 9 October 2013

Provisional Agenda Item 4

FMM(13)(O)2

Trade Finance and the Commonwealth*

Commonwealth Secretariat Marlborough House London SW1Y 5HX September 2013 ______________________ * This paper was prepared in collaboration with Overseas Development Institute (ODI) - Zhenbo Hou and Dirk Willem te Velde))

Contents Executive Summary.................................................................................................................................. i Introduction ............................................................................................................................................ 1 Facilitating Trade in the Post-2015 World .............................................................................................. 2 Expanding Trade – Opportunities for the Commonwealth .................................................................... 3 Trade Finance .......................................................................................................................................... 4 (i)

Components of Trade Finance and Major Providers .................................................................. 4

(ii)

Trends in Trade Finance .......................................................................................................... 8

(iii)

Gaps in Trade Finance ........................................................................................................... 12

(iv)

Constraints in Accessing Trade Finance in the Commonwealth ........................................... 15

Addressing Challenges in Trade Finance – Options for the Commonwealth ....................................... 18 Conclusions ........................................................................................................................................... 20 References ............................................................................................................................................ 22 Appendix A Some Multilateral and Regional Public Providers of Trade Finance................................ 24 Appendix B Sample of Export Credit Agencies and Other Sources of Trade Finance in the Commonwealth..................................................................................................................................... 29

Executive Summary There is very significant opportunity to expand both intra-Commonwealth trade, as well as the share of Commonwealth member countries’ trade with the rest of the world. There is also a very substantial empirical literature which provides evidence for the importance of trade for the economic prospects of developing countries. Doing so offers the opportunity to increase income, promote learning, increase the diffusion of technical knowledge, expand employment, improve standards of living and contribute to structural transformation. Empirical evidence also points to a range of domestic and international policies which can be supportive of trade, including international trade rules which improve the prospects of the poorest, smallest and most vulnerable developing countries to sustain and expand trade, strengthening of domestic institutions, skills, technology and infrastructure to support trade, as well as the availability of trade finance. 2. The paper examines this latter ingredient – access to trade finance on affordable terms - in achieving an expansion in intra-Commonwealth trade; and in strengthening Commonwealth trade with the rest of the world. Trade finance is a neglected aspect of policy focus, yet an important element of modern trading relationships. With global trade estimated to aggregate in excess of $18 trillion, some 80-90 per cent of trade, or between $14.4 - $16.2 trillion, is covered by some form of trade finance, including letters of credit, open account and others instruments. A