The global trade finance gap reached an unprecedented high of $2.5 trillion in the preceding year, according to the Asian Development Bank (ADB). This surge in the trade finance gap has been primarily attributed to heightened economic risks that have stretched the financing capacity of banks, it said in a report. The trade finance gap, which signifies the disparity between the requests for financing to facilitate international trade and the actual approvals granted, saw a substantial 47% increase from the prior year when it stood at $1.7 trillion.
Several contributing factors have widened the gap including rising interest rates, uncertain economic prospects, inflationary pressures, and geopolitical volatility collectively played a pivotal role in exacerbating the situation. These findings have been unveiled as part of ADB’s 2023 Trade Finance Gaps, Growth, and Jobs Survey, which was published recently.
Expressing concern over the widening trade finance gap, the ADB emphasised its detrimental impact on the potential of international trade to foster essential human and economic development, including job creation and economic growth. Notably, approximately 80% of global trade relies on some form of financing, underscoring the significance of resolving this issue.
The report comes at a time when global trade continues to face challenges, despite the approach of the peak season leading up to year-end holidays.
The survey findings
Survey respondents in the report highlighted various constraints within the trade finance landscape, with a significant 60% of banks reporting that Russia’s invasion of Ukraine had a notable impact on their trade finance portfolios. This geopolitical development amplified the complexities and risks associated with international trade finance.
Remarkably, the report also sheds light on a potential solution to reduce the trade financing gap—aligning trade practices with Environmental, Social, and Governance (ESG) principles. While ESG alignment is seen as a promising avenue, it may also entail increased financing costs due to the need for more intricate due diligence processes.
Furthermore, the survey uncovered a critical concern among firms involved in global supply chains: insufficient financing. In fact, insufficient financing emerged as the top supply chain challenge faced by these firms. Respondents underscored the importance of access to adequate financing, the reliability of logistics, and the integration of digital technology as crucial components for building resilient supply chains in the face of the challenging trade finance landscape.
