Academic journal article Journal of Southeast Asian Economies

Establishing an Export Credit Guarantee Scheme to Support Myanmar Exporters? an Exploration

Academic journal article Journal of Southeast Asian Economies

Establishing an Export Credit Guarantee Scheme to Support Myanmar Exporters? an Exploration

Article excerpt

Myanmar's trade deficit has widened dramatically in the past few years. One of the reasons lies in the lack of trade finance for exporters and certain financial sector shortcomings more generally. This policy note introduces the idea of establishing a public Export Credit Guarantee Scheme (ECGS) and explores if and how this policy measure could support the rebalancing of Myanmar's trade deficit. Such a scheme could help relieve export constraints by: first, facilitating access to credit for exporters by mitigating risk and increasing banks' willingness to lend; second, helping exporters to offer better payment terms to importers; and third, contributing to enhance confidence in Myanmar entities (both banks and enterprises) among foreign entities. Looking at the experience of other countries, the policy note also points to a number of guiding principles that policymakers should consider when pondering the idea of setting up an ECGS. Moreover, it highlights that certain challenges have to be expected. First and foremost, given the low level of financial sector development and limited existing knowledge on trade finance, it is questionable whether the necessary skills and capacities to properly operate such a scheme are available in Myanmar. Seeking international support can help to address this issue. A practical way forward might be to pilot an ECGS with a rather small portfolio of products that targets one or a few sectors to test the ground while limiting the public resources at risk.

Keywords: Myanmar, export credit guarantee scheme, trade deficit, export promotion, financial market, trade finance.

1. Introduction

Despite far-reaching reform efforts, there are still various financial sector constraints that hamper the competitiveness of Myanmar exporters and hold back the expansion and upgrading of exports. These include several financial market regulations and institutional shortcomings that complicate transactions between foreign and Myanmar entities, including businesses and banks, thereby making local suppliers less attractive to foreign buyers. In particular, a lack of access to trade finance (and credit more generally) imposes constraints on the cash flow of exporters. This is particularly grave for Myanmar, given that the country only recently has made a comeback in international trade, which implies that foreign buyers often lack the trust in Myanmar institutions and producers that develop with long-standing international commercial relationships.

Generally speaking, whenever they are not paid in advance by the importer, exporters have to bridge a time gap between their expenditures on production and receiving payment. Due to longer transportation times and customs procedures, this time gap tends to be particularly large in international transactions. Exporters are thus often required to pre-finance working capital and/or the purchase of production inputs. They can try to cover these expenses through internal funds or through external funds, for example, by taking out a credit. However, export finance is very scarce in Myanmar. This can create liquidity problems for exporters that disrupt their business. In an extreme scenario, if they cannot obtain the necessary finance, potential exporters may even have to forego the export order. This is a significant issue in Myanmar, whose trade deficit has widened rapidly in recent years so that boosting exports has become a policy imperative.

In principle, different policy approaches are possible to tackle trade deficits, and a variety of policy measures have been applied in practice. For example, one possibility is the restriction of imports (such as through tariffs or non-tariff barriers to trade). In this policy note, however, we focus on measures to promote exports. Some countries rely on state-owned development banks to directly lend to (potential) exporters, sometimes at subsidized interest rates, thereby expanding and facilitating exporters' access to finance (Chandrasekhar 2016). …

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