# **Executive Summary**

In the aftermath of the Lehmans Brothers collapse in September 2008, Pascal Lamy, Director General of the World Trade Organization, warned the international development community about the drop in the supply of trade finance, critical engine for trade transactions. These warning were supported by the increase in spreads, the spilling over of the financial crisis among both developed and developing countries, and by anecdotal stories reported by the press about developing country exporters constrained by trade finance. As of December 2008, trade finance deals were offered at 300-400 basis points over interbank refinance rates—two to three times more than the rate a year earlier. The cost of Letters of Credits was doubling or tripling for buyers in many countries, including China, Turkey, Pakistan, Argentina, and Bangladesh. At the same time, trade was dropping drastically in most countries in the Fall 2008. Exports and imports of forty-five countries that had reported trade data for January 2009 were uniformly weak, with an average drop of over 30 percent as compared to January 2008. Global trade of merchandise and services was projected to decline in 2009 for the first time in decades.

Yet, little was known about the magnitude of any potential shortage or ‘gap’ in trade finance, whether it was mainly demand or supply driven, the real impact on developing country exports, and the type of policies governments and international organizations should put in place to mitigate the impact. One of the reasons was the lack of data in this field. Banks rarely report trade credits volumes, and corporate lending is not globally collected. Selected data used to proxy trade finance trends indicated that trade finance flows was dropping. According to Dealogic,<sup>1</sup> global trade finance contracted by about 40 percent in the last quarter of 2008 as compared to 2007. Data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on short-term trade finance messages sent between banks for letters of credits, guarantees and documentary collections showed a decline of 3.5 percent in October 2008 as compared to the same period in 2007. These early alarming signs were corroborated by historical evidence that trade finance tends to be highly vulnerable in times of crisis, as it was the case in East Asia in the late 1990s.

A critical question to the development community was to capture the impact of the crisis on developing countries in terms of availability of trade finance to their exporters and importers and the impact on trade flows. Several organizations have joined efforts to collect field data. The IMF-BAFT launched a survey of about 40 banks in developed and emerging markets in October and November 2008<sup>2</sup> . Their results indicated that there has been a widespread increase in pricing of all trade finance instruments relative to banks' costs of funds, but the quantity changes have been mixed. They also estimated that banks’ trade finance capacity constraints impact about 6-10 percent of developing country trade, implying a trade finance gap in the order of $100-300 billion.

The World Bank has sought to complement these efforts by conducting in March/April 2009 a firm and bank survey on trade and trade finance developments in developing countries since the beginning of the financial crisis. In total, 425 firms and 78 banks were

> 1 Dealogic is a leading provider of global investment banking analysis and systems and one of the few sources of information on trade finance developments.

> 2 IMF- BAFT - A Survey among Banks Assessing the Current Trade Finance Environment- August 2009, Mimeo.

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