How Covid-19 Brought Disruption In Global Trade And Finance & The Role Of Blended Finance

Jan 04, 2022 - 06:42 AMAuthor - Kenneth Jackson

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The covid-19 pandemic has also hit the global trade and Sustainable Development Goals. Global trade, an industry valued at around US$17 million, which extends direct support to businesses all over the globe, too is feeling the disruptions.

The covid pandemic has created challenges for the supply chain and global trade in these four ways.

Supply chain and logistic uproar

Consumers all over the globe faced shortfalls or delays in the supply of products with businesses enduring the same struggle, precisely, companies who are sourcing products from different vendors across various countries.

Global trade and supply chain uproar impacts the economic system and job creation. It affects developing market businesses and hinders their ability to export goods, initiating cutbacks in export jobs, making SMEs and working-class people’s lives difficult. 

Lives are affected when life-saving equipment is unavailable or delayed. However, such challenges can be solved by putting out necessary things first.

Reviewing supply chain procedures and industrial strategies

Companies are seen revising their supply chain procedures; however, only some of them can withstand pandemic requirements.

Redundancy and diversification is the latest coping mechanism. Like recently, Japan allotted US$2.4 billion to help local businesses to move back their production unit to Japan and other southeast Asia. Cost increases might happen that companies will carry forward to the end-consumers. This will occur in every industry, especially where cross-border supply is involved. The government has also started reviewing necessary goods like face masks, PPE kits, testing kits to see if they can be generated locally to avoid internal cost competition.

As businesses invest resources in supply-chain modification, the government will re-assess their norms on necessary goods to keep up with the current needs.

Digitalization for stability

The covid pandemic has shown urgency to digitize the global trade and supply chain to keep goods moving and services operating.

This trend revolutionized the whole global trade finance system, which seems majorly paper-based.More work is needed to build a global digitized infrastructure with laws and standard regulations and technical protocols. This will majorly need fundings, international dialogue, and carry re-engineering over trade finance bank departments, customs, shipping agents, and freight companies.

For example, have you heard about the partnership of TDB and dltledgers? This platform employs blockchain technology to help trading industries connect their financing banks and supply chain strategies, thus digitizing the trade finance system.

Distress in trade finance and banking structure

Financial institutions' credit appetite tends to transform with lag, but it can be abrupt when done. The pandemic high demand shock led to increased bankruptcies and non-performing loan amounts, stressing financial institutions globally.

For instance, in the rise of the Global Economic crisis, developed nations quickly lessened their risk limits but restricted all credit letters from under-developing or developing nations issuing banks.

As trade finance paused, it posed threats to the essential trade cycle and job generation, and various DFIs came in to offer guarantees of banks at a market-conform price. DFIs like EBRD, IFC, ABD continue to process these programs with huge development and financial success.

With covid-19, global trade finance has not suffered any potential credit or operational risk, but the GEC
scene might repeat. So, let's hope for the better but do not undermine the worst!

How can blended finance assist economic recovery and stabilize global trade?

Though blended finance does not play a significant role in managing covid19 disruptions, it can significantly contribute to these three-mentioned areas.

Lowers costing on goods

The government reanalyzing their industrial norms to boost pandemic stability and achieve self-dependency for essential goods will probably pursue PPPs to reduce pressure on the public front. Here, the government concessions the production and supplier of critical products to the private forum and backs these discounts off-take contracts.

Blended finance can lower the prices of essential commodities, like medications, life-saving equipment,to make these accessible to the low-income class consumer by eliminating the cost of production via philanthropic funds and international health agencies.

Catalyze private-sector funds

DFIs development agencies are focused on funding the digitization of global trade finance in nations deemed the primary nodes of international trade. This again can take the form of PPPs, where the blended price can be employed to catalyze private capital, giving an average financial return for the risk taken for making a big digital investment.

The disruption caused due to covid-19 has affected the supply chain and global trade inflicting job crisis significant and economic disbalance. Digitalization can help businesses grow and function along with cross-border trading.

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