FOR GLOBAL TRADE STABILITY, SUPPORT SMEs

The confluence of recent extraordinary events such as the COVID-19 pandemic and Russia’s invasion of Ukraine has simultaneously created obstacles and opportunities for small businesses around the world to engage in global trade.

Costs have risen precipitously for everyone, as inflation rates have reached 40-year highs in many countries. But the cost of financing is rising even faster for the smallest companies that don’t enjoy the investment-grade credit ratings of their larger counterparts.

At the same time, the supply chain woes still burned into the memories of procurement departments the world over are resulting in a quest for greater resiliency wherever possible through supplier diversification and increased on-hand inventory.

Citi’s recent Supply Chain Finance report found that multinational corporations are looking to extend relationships with current suppliers and broaden their base of suppliers to cushion any future disruptions.

As they do this, they are looking to strengthen not only their physical supply chains but also financial supply chains, recognizing the importance of suppliers’ access to working capital. Many of these “last mile” suppliers are by nature the small and medium-sized enterprises (SMEs) experiencing the most acute inflationary pressures.

SMEs account for more than 90% of businesses and more than 50% of employment worldwide, yet their participation in international trade is limited. This is a particularly large concern in developing economies.

In Africa, for example, more than half of these suppliers do not have access to financing – and globally, deferred credit payment terms remain a major source of uncertainty for smaller companies.

Support SMEs for a more inclusive global economy

To overcome these challenges and capture the opportunities in front of them, SMEs need help from both private and public entities. By supporting them through deeper supply chain financing, we can simultaneously increase the stability of international trade and create a more inclusive global economy.

With financial institutions serving as an intermediary, supply chain financing programmes help facilitate faster payments from buyers to suppliers and enable buyers to reach deeper and build stronger relationships. By taking advantage of the stronger credit quality of buyers, suppliers can access working capital at lower costs.

However, private sector finance programmes face limits when it comes to promoting supplier relationships, especially in developing economies. It is here that global development institutions have a key role to play.

Through their unique position and specialized knowledge, multilateral agencies, development finance institutions and sovereign governments can fill in the gaps to help reduce risk for creditors and allow financing to reach grassroots levels.

They can invest directly into private sector projects in low- and middle-income countries where financing programmes cannot easily access.

Importantly, many of these institutions have a mandate to increase their activity as economic conditions worsen, and they can leverage their own creditworthiness in the same way a financial institution would to provide greater access for SMEs.

If financial conditions continue to tighten this year, as we expect, then it will be all the more important for multilateral agencies and development finance institutions to step up their work, as some already have, to support these opportunities for small businesses.

Multilateral agencies key to supply chain sustainability

Multilateral agencies are critical to advancing the sustainability of supply chains, which is an increasingly important goal for many corporate clients.

For example, in 2021 the International Finance Corporation partnered with Citi and McCormick & Company to launch a programme to provide suppliers of McCormick’s herbs and spices with financial incentives linked to improvements in measures of social and environmental sustainability.

The future of global trade is far different than what we had anticipated a few years ago. Regardless, the solutions are becoming clearer.

Harnessing the dynamics of shifting supply chains as an opportunity for SMEs is a group effort that could pay us all back in the form of a more equitable and resilient future. Relationships will grow in turn, and other benefits will follow.

Fostering inclusion will help smaller suppliers keep pace with ever-changing markets down the supply chain, and with time, enable this massive group of businesses to better engage on a global scale.

Source: WEF