ECAs Contribution in Boosting a Nation’s Economy

Credit fuels economic activity. It allows agents to indulge in trade without the required cash in hand. The demand for the facility of “Buying Now, and being able to Pay Later” has increased exponentially with the growth of e-commerce and emerging fintech. Insufficient and irregular cash flows are familiar issues at production, sale, or purchase for almost all trades. These issues become substantial when the trade is cross-border. Both exporters and importers are throttled with scores of challenges in channelizing such cross-border trades, to which financing is the key solution.

While businesses are familiar in most part with their domestic or other proximate environments that they have been trading with, breaking into new markets is a high-risk strategy notwithstanding commercial contacts the business may have, especially in the SME/mid-market space. A traditional provider of certainity in this space is the ECA, both government-owned and private.

Export Credit Agencies (ECAs) function as intermediaries between a country’s government (in the case of state-ownership) and exporters to provide export financing and insurance solutions. ECAs are government, quasi-government, or private setups established for facilitating domestic companies in international exports through trade finance, export credit, and risk mitigation.

ECAs support exporters and financial institutions – and hence the country’s economy. Thus, various national governments encourage exports for a healthy and vibrant economy. The GDP of the GCC countries incorporates approximately 40% of their export component. The Kingdom of Saudi Arabia (KSA) aims to achieve a rise of 50% from the current 16% of “non-oil exports to GDP share” under their Vision 2030, while the Gulf Cooperation Council is seeking to adopt economic diversification. Exporting to over 180 countries, the UAE aims to achieve 50% of national exports. The USA expects to invest around $90 trillion over the next 15 years to strengthen its export supplies for foreign Government Procurement Opportunities. Also, India targets $500 billion of exports in the next two years. While the economies globally are recovering from the pandemic, there are continuous efforts to gain a competitive advantage and increase exports to generate more employment and boost the GDP.

?Export Financing

Export Financing is the trade financing solution for the credit requirements of an exporter. The key credit requirements can be listed as follows:

1. Pre-shipment requirements for Startup Capital, Capital for expansion from Domestic to International Markets or Inventory Acquisition Capital
2. Post-shipment requirements for maintaining adequate cash flows for the exporter’s working capital. The cash flow gap between product shipment and payment receipt can range from one month to three months, providing the exporters with better cash flow management.

These two financing requirements support the economy’s MSMEs in real terms and promote real GDP.

1. Protection against market risks is an insurance requirement owing to protection against exchange-rate risk and credit risk. Political risk is also covered by ECAs since cross-border laws are involved. Credit insurance services are more capital-efficient than direct lending for exports.

ECAs cater to these financing requirements via direct credit on their accounts, direct credit from financial institutions, and export insurance solutions.

?Role of ECAs

Exports are a crucial part of GDP. Supporting export mechanisms is salient for economies, especially when recovering from the pandemic shock. In FY 2020, EXIM Bank, the official ECA of the US, offered relief measures to help the economy recover from COVID-19; those included financial expansions guarantees for - pre-delivery, pre-export, supply chain, and working capital. As of September 2021, the USA had 86.9% of total small business exports directly financed by the EXIM Bank. EXIM Bank has supported nearly $9,219.1 million of US Exports, witnessing an increment of 6.8% from the previous year in total export credits.

The Exim Bank of India gave 7% more export credits in 2021 than in 2020. The country’s economy received support on export contracts worth $3.60 billion during the year. Talking of Emerging Markets, China is not behind. SINOSURE, the Chinese official ECA, has been ranked by the Berne Union at the top for the total sum insured. It has supported $5.3 trillion of domestic and foreign trade and investments at the end of 2020, along with numerous credit-related services to 210,000 enterprises.

Also, the Middle East countries are promoting non-oil exports to boost the economy. As the countries are recovering from the historical oil price drop, export credit is being considered for a genuine campaign for industrialization. To this end, the Saudi Export-Import Bank has agreed on $100 million with Arab Investment & Export Credit Guarantee Corporation. Moreover, on the first meeting with Berne Union at its AGM, Saudi EXIM signed off a $25 million credit line to Ukreximank. KSA is seeing its export potential and is proactive in making investments in export credit and insurance initiatives.Etihad Credit Insurance, the UAE federal export credit company, reported three-digit growth to UAE exporters, with non-oil trade secured reaching AED11.4 billion, a 128 percent growth compared to AED5 billion in 2020. It also issued 6,620 revolving credit limits in 2021, up 229 per cent from the 2,013 facilities a year earlier. The value of exposure it has underwritten has increased by 266 percent to reach AED5.6 billion from AED1.53 billion during the same period.

ECAs, have helped economic growth and provided critical support to the nations to evolve from the crisis created during the pandemic. Attempts to make SMEs aware of such export credits and bring transparency to the processes will add to the success of ECAs’ efforts.

Source:

www.exim.gov ; www.sinosure.com ; www.xinhuanet.com ; www.commerce.gov; www.business-standard.com; www.eci.gov.ae ; www.moec.gov.ae