Funding a Revival

Financial assistance serves to help bridge gaps caused by the pandemic

Compiled by Zulfath Saheed

Export finance can play a significant role in improving the competitiveness of exporters and assisting with the diversification of a country’s export structure. It encompasses a range of mechanisms to help promote exports to new markets in addition to helping diversify the export product portfolio.

With a focus on providing payment, financing and risk mitigation solutions that support transactions between exporters and foreign buyers, export finance can help address some of the challenges faced by the sector.

As a position paper titled ‘Expanding Exports: Role and Relevance of Export Finance’ compiled by Verité Research notes, the “ability to offer payment terms more favourable to buyers enhances the chances of exporters securing more orders.

“Export finance instruments enable exporters to offer competitive payment terms to buyers whilst mitigating the default risks and working capital shortages that arise from such competitive payment terms,” it adds.

Verité Research also observes that “instruments of export finance can be provided by private banks and financial institutes specialising in trade financing, acting on their own or on behalf of the government. International financial institutes such as multilateral development banks… also provide risk mitigation solutions to support international trade.”

Experts continue to call for the setting up of an export-import (EXIM) bank in Sri Lanka in recognition of the fact that specialised export credit agencies play a vital role in emerging markets when it comes to promoting trade – especially facilitating SME participation in global trade.

To this end, the Verité Research study also unearthed gaps in the export finance market in Sri Lanka, highlighting the need for an EXIM bank. It points out that “although the banking sector provides export finance, they mainly cater to large established exporters – and mainly facilitate trade with developed countries where the risk is relatively low.”

“An EXIM bank can help address these gaps by offering innovative export finance solutions and services tailor-made to SMEs, incentivising bank lending at competitive rates to exporters venturing into developing country markets by taking over risks that the private banks are unwilling to take, addressing asymmetries and gaps in information, and expanding training and capacity building opportunities for exporters,” the report adds.

Meanwhile, in March last year, the Central Bank of Sri Lanka announced wide-ranging financial concessions to mitigate the challenges faced by businesses in the wake of the COVID-19 pandemic, which were applicable to an array of organisations including export related enterprises.

These measures were intended to help the country’s export sector tide over the difficult business environment it would encounter in the ensuing months.

The concessions granted included a moratorium on debt capital and interest, and working capital loans at an interest rate of four percent, disbursed by way of commercial and specialised banks, finance companies and leasing companies.

Moreover, an investment loan facility of not more than Rs. 300 million was provided at a concessional interest rate for business expansion.

Financial institutions were offered a debt moratorium for a period of 12 months for affected SMEs, and tourism, apparel, plantations, IT and related logistics service providers, thereby providing relief to borrowers who had been hard hit by lockdowns both at home and overseas.

The penal interest to be charged until 25 March was waived by relevant financial institutions. In addition, financial institutions were permitted to grant supplementary loans or new rupee loan facilities for investment purposes provided that borrowers were able to produce credible business plans.

While export industries are impacted by the disruption to supply chains and facing difficulty to complete orders, many industrial sectors including apparel, IT, tea, spices, plantations and related logistics suppliers, as well as SMEs with a turnover of less than one billion rupees involved in a wide range of sectors, are eligible for these concessions.