Sep 15, 2015 (LBO) – Sri Lanka should recognize the importance of export financing especially with regard to the small and medium scale sector to expand existing exports to the world, Verité Research said.
Sri Lanka’s share of exports to GDP was 15 percent last year and has been on a declining trend since 2000.
The research firm in a recent study has highlighted export financing as a key factor to reduce export oriented risks which ultimately allow exporters to attract more buyers and increase exports.
The small and medium scale exporters usually face added risks to the normal risks of business including a range of commercial and country risks.
Commercial risks can be explained as risks associated with the default payments by buyers due to various reasons and country risks are a result of laws and actions by respective foreign countries.
Head of Economic research at Verité Research Subhashini Abeysinghe said export financing can mitigate these risks through credit schemes specially designed for exporters.
“But government policy and action is required to enable and expand the reach of export finance instruments,” Abeysinghe said.
The small and medium scale exporters are currently contributing below 5 percent of total exports.
“The lack of export finance instruments is one explanation for this low level contribution,” she said.
The difficulty of expanding exports stems from the fact that Sri Lanka does not have many products to export and over 50 percent of country’s exports comprise of apparel and tea.
More than half of Sri Lankan exports also end up in the hands of traditional buyers like European Union and United states.
Verité Research has outlined four types of interventions in order to expand exports using export finance instruments.
Introducing new export financing solutions such as export factoring, insurance and guarantee schemes to reduce finance costs have been highlighted as a key step.
The second point is to improve the access to reliable and updated information about buyers and markets to mitigate commercial risk and country risk.
Sri Lanka’s Credit Information Bureau will also have an opportunity to share credit information with other countries to improve a reliable credit information system.
Currently export finance is largely provided by the commercial banks and export credit insurance is provided by the Export Credit Insurance Corporation of Sri Lanka.
Two to four percent of Sri Lanka’s exports are currently covered by credit insurance while the world average is between 10 to 12 percent.
Improving capacity, professionalism and credibility of export financing institutions has also been identified as an important intervention.
Lastly, establishing an export and import (EXIM) bank; as having a specialized agency of this nature will help better execute the interventions.
“EXIM banks literally take away the risks that the primary financial institutions are unwilling to take,” Abeysinghe said.
“So thereby they encourage commercial banks to lend to the export sector,” she said.