EXPORT INSURANCE
Path to Expansion
Innovative finance instruments that protect exporters and facilitate growth
The large-scale disruptions in global trade and supply chains witnessed over the last year due to the onset of the COVID-19 pandemic have served to highlight the role of export finance instruments in facilitating international trade.
While an element of risk has been the norm in the export sector due to political uncertainty and frequent changes to trading terms – such as with the introduction of or adjustments to tariffs – the pandemic has shed light on the importance of export credit in mitigating unforeseen risks.
For example, export credit insurance can serve to protect businesses against commercial, country or macro risks, as well as those related to transport and logistics, foreign exchange rates or banks and the resulting losses.
These solutions can also play an important role in enabling competitive pricing while addressing default risks and working capital shortages that arise from such terms.
According to Verité Research, there is scope to develop and extend the use of export finance instruments in Sri Lanka, which could also facilitate diversification of the country’s export basket. The share of export transactions covered by export credit guarantees or insurance was estimated to be between two and four percent in 2015 compared to the global average of 10-12 percent.
While the Sri Lanka Export Credit Insurance Corporation (SLECIC) operates as the nation’s official export credit agency, commercial banks and other financial institutions also provide such instruments. Therefore, there are opportunities for the public and private sectors to collaborate, and introduce innovative instruments that could facilitate and promote exports.
The think tank notes that exporters have received requests for longer credit periods among other demands from buyers in recent years.
This has resulted in local businesses bearing much of the risks associated with delays in payments and defaults, which can disproportionately affect SMEs. Export insurance is an instrument that financial institutions can provide to protect exporters against these risks.
Given that the nation’s exports are dominated by a few large companies catering to a few markets and buyers to a great extent, a study conducted by the Commonwealth concluded that “there is a lack of a risk appetite for increasing international trade among Sri Lankan exporters.”
This could be addressed by the provision of export finance facilities that encourage domestic oriented businesses to engage with offshore markets. These products could contribute to the diversification of Sri Lanka’s export baskets and markets, while enhancing competitiveness and innovation.
As such, the development of various export finance instruments could serve to shift Sri Lanka’s offering from low skilled and labour intensive exports while encouraging domestic businesses to venture into markets that may not be presently served by the country’s leading exporters.
There have been multiple proposals to establish an Exim bank over the years, which could address the unique needs of the export sector, which the private sector is unable to cater to.
Moreover, such an institution could provide additional support including information, training and guidance to encourage the exporter community.
SLECIC and export oriented institutions such as the Sri Lanka Export Development Board (EDB) are uniquely positioned to extend support to the sector in terms of raising awareness about the need for export finance and insurance while enabling exporters to access finance at reasonable costs.
As for the private sector, although several financial institutions have introduced instruments and other initiatives targeting exporters, there continues to be scope to expand these offerings to support the sector as it faces uncertainty in global markets.
