The Changing Role of Export Credit Agencies

INTERNATIONAL MONETARY FUND

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781557758019
• Year: 1999

NONE

1 Introduction

The first export credit agency, the Export Credits Guarantee Department (ECGD) of the United Kingdom, was established in 1919. Its original purpose was to encourage and support exports (initially to Russia) that would not otherwise have taken place. Similar motivations led to the establishment of the Export-Import Bank of the United States (the U.S. Eximbank) in 1933. There was little further activity on the export credit front in the 1920s and 1930s, but many such agencies were founded after World War II. As it appears in hindsight, the chain of reasoning for governments becoming involved in this area probably went along the following lines:

• Certain risks, especially political risks, in some buying countries, although an inherent part of international trade, were regarded by some exporters as unacceptable.
• A similar view on such risks was also taken by what would in other circumstances have been a source of help or support, namely, banks and insurers.
• Thus, exports that would have occurred in the absence of these risks were being lost.
• But an insurance or other risk mitigation facility, provided or backed by the government of the exporting country to the exporter or the exporter’s bank, could provide sufficient encouragement and protection to enable these exports to take place.

Thus, against a background of private sector unwillingness to regard political risks as acceptable (a theme that is picked up later in this volume in a number of contexts), the primary motivation of governments was no doubt the stimulation of exports that would otherwise be forgone. Increased exports offered the associated economic and industrial benefits of protecting or creating employment, as well as the political benefits (to the government or regime in power) that would flow therefrom. Added to this were the hoped-for benefits of increased trade for foreign policy, through the cementing of diplomatic relations with trading partners. Inherent, if not necessarily explicit, in these calculations was almost certainly the policy objective of filling a perceived gap in the marketplace—not that of engaging in insurance or banking in competition with the private market. Hence the frequently repeated slogan that official export credit agencies should “complement, not compete” with the private sector.

In the first couple of decades after World War II, more and more countries set up export credit agencies. This trend has continued—in fits and starts—until the present. Table A6 in Appendix III lists the major export credit agencies and the dates they joined the International Union of Credit and Investment Insurers (the Berne Union), the principal international organization of export credit agencies.

As will be shown later in this volume, however, the role and objectives of export credit agencies are now by no means as clear, common, or consistent as they may have been at their founding. In particular, now that the private sector is increasingly willing to underwrite political risks on a substantial and growing scale, many export credit agencies are having for the first time to wrestle with the practicalities of operating under two seemingly conflicting objectives. On the one hand, many governments, especially those subject to keen budgetary pressures, today expect their export credit agencies to break even. On the other hand, these agencies often also remain “insurers of last resort,” expected to accept business that private sector insurers are reluctant to take, rather than compete with the private sector for the same business.

Also important in understanding the changing role of export credit agencies is to avoid confusing the facilities they provide either with bilateral aid programs or with industrial support programs for exporting companies or sectors. As noted later in this volume, various considerations relating to aid and industrial policy will often factor into the decision whether or not export credit agencies should provide insurance cover. But these agencies have also been under increasing pressure to meet the requirement, first set within the General Agreement on Tariffs and Trade and now by the World Trade Organization, to break even over time. Yet long-term balance in the accounts of export credit agencies is not a simple, straightforward concept, let alone an easy, specific, and measurable objective.

Activity and Trends

Appendix I presents some detailed statistics on the activities of those export credit agencies (the majority of such agencies worldwide) that belong to the Berne Union (see below). These numbers demonstrate the very large volume of business that these agencies undertake and the vast amount of world trade that they support. For example, in 1997 the 47 members and observers in the Berne Union supported exports of $410 billion. Facilities they issued included $70 billion in new medium- and long-term credits to nonmember countries of the Organization for Economic Cooperation and Development (OECD). And from 1982 to 1997, Berne Union members

• Supported exports with a total value of $5.6 trillion
• Paid claims of $154 billion
• Made recoveries (collections on unpaid debts on which an agency has paid a claim) of about $71 billion
• Supported investments of $83 billion
• Supported medium- and long-term credits to non-OECD countries of $550 billion
• Supported short-term trade finance business (much of it covering commercial risk on exports to OECD countries) of about $4.1 trillion, and
• Received premium income of about $40 billion.

As of the end of 1997, the combined exposure of Berne Union members was $515 billion, of which about $431 billion was in respect of medium- and long-term export credit, almost all of it on non-OECD countries.

The Berne Union

All of the older export credit agencies, and many of the newer ones that meet the membership criteria, belong to the Berne Union, known formally as the International Union of Credit and Investment Insurers. Appendix III provides a background note on the Berne Union, and Appendix IV lists the organization’s members and observers.

But this is no longer the whole story. There are now a number of newer or smaller export credit agencies that do not—yet, at any rate—qualify for membership in the Berne Union. (This group includes a number of export-import banks, or eximbanks, which lend directly for trade transactions as well as insure lending by others.) Some countries with export credit agencies that are not Berne Union members are Bulgaria, Brazil, Chile, Colombia, Croatia, the Islamic Republic of Iran, Kuwait, Latvia, Lithuania, Malta, the Philippines, Romania, Russia, the Slovak Republic, Thailand, Tunisia, and Uzbekistan.

There have also been some efforts toward establishing regional export credit schemes or institutions, for example in the Persian Gulf, in certain other Islamic countries, in Africa, and in the Caribbean. For various reasons—not least the problem of who ultimately should bear the risks and finance the organization—so far none of these plans has developed in any significant way.

2 The Development of Export Credit Agencies

There is no such thing as a typical export credit agency. They come in all shapes and sizes. For example:

• Some export credit agencies are government departments, some are public corporations, and some are private companies (some of which may write most of their business on their own account but retain a link with their governments for at least part of their business).
• Some do only short-term business, some do only medium- and long-term business, and some do both.
• Some only insure or issue guarantees, some lend, and some do both.
• Some are called insurers and some eximbanks.
• Some provide only export credit insurance, and some only investment insurance, but most (at least of the larger agencies) do both.
• Some are very large, with premium income in the hundreds of millions of dollars, whereas others are considerably smaller.
• Some primarily underwrite political risk and some primarily commercial risk, but most cover both categories.

Just as there is no typical export credit agency, neither is there any single perfect model for an export credit agency, applicable at all times and in all countries. It is also very dangerous simply to try to transplant one model in one country to a very different country. The status and facilities of an export credit agency need to take account of the country’s situation, which may well change over time. Thus, for example, in some countries at some times it may be perfectly sensible and appropriate for the export credit agency to be involved in providing working capital, but it may not be in the same country at other times or in other countries. Unfortunately, much energy, time, and resources continue to be wasted in the search for some perfect, timeless, and universally applicable model for an export credit agency and its facilities.

It follows that it is rather dangerous to generalize about the roles, position, status, policies, and objectives of export credit agencies, although much of the remainder of this volume will do just that. However, attention is drawn to the problems that can arise when export credit agencies are writing all or most of their short-term business—and especially their commercial risk business—on their own account, with private market reinsurance. They then have no link with their governments on this business. This can complicate any coordination of responses to countries with large external debt burdens and balance of payments crises, to take account of this and other significant changes in the composition of external debts. Similarly, the word “guarantee” means different things to different export credit agencies (see Appendix II) and should be treated with caution.

Some Basic Models

In looking at the major activities of export credit agencies, it may be helpful first to review briefly and in basic terms where export credit agencies fit into some of the most common trading arrangements.

Basic Mechanisms of International Trade

The most basic model of international trade consists of the exchange of goods and services for cash payment between an exporter in one country (country A in Figure 1) and an importer in another (country B). In the real world, however, it is unusual for an importer to pay cash with its order. Most world trade is conducted on the basis either of payment on receipt of goods or of payment within 180 days of receipt. This need to extend credit in order for most international trade to take place introduces some degree of uncertainty, as does the fact that both the goods and the payments cross borders. Thus, the simple model just outlined needs to be developed to take account of the roles frequently played by banks in the two countries (Figure 2).

Figure 1. A Simple International Trade Transaction

Figure 2. A Trade Transaction with Payment Through Banks

Banks may play roles over and beyond simply providing the channel by which money is transferred from importer to exporter. For example, the exporter’s bank may also send the documents giving title to the goods (e.g., shipping documents) to a bank in the importing country, with the stipulation that these should only be released to the importer when the importer hands over the money to pay for the goods.

As a further development, the exporter may not know, or may have doubts about, the importer. This may lead the exporter to look for some way not only of moving the money but also of securing protection against some of the risks of nonpayment or nonperformance on the buyer’s part. Similarly, importers may not know or trust their exporters and will not wish to pay for goods without seeing them. One means of tackling this problem, governed by very widely accepted international practices and conditions, is the letter of credit. These are opened by banks in the importer’s country and sent (now often electronically) to banks in the exporter’s country.

Letters of credit usually contain very strict and precise conditions regarding the circumstances under which the bank in the importer’s country may release title, and so transfer ownership of the goods, to the importer. They also specify the circumstances in which the bank in the exporting country may release payment to the exporter. However, once the terms and conditions of the letter of credit have been fully complied with, the importer’s bank (bank B in Figure 3) is obligated to pay the exporter’s bank (bank A), whether or not bank B has received the money from the importer. But bank A is not obligated to pay the exporter unless and until it has received the funds from bank B.

Figure 3. A Letter of Credit Transaction

This gap can be closed if bank A is prepared to confirm the letter of credit opened by bank B. Often it will do so only if it is already holding funds belonging to bank B sufficient to cover the letter of credit. This point is especially important if there are any doubts about bank B’s ability to transfer foreign exchange, for example because of shortages of foreign exchange in bank B’s country or delays in transferring such payments.

The Role of Export Credit Agencies

It is clear from even this simplified model that exporters and their banks face a range of uncertainties and risks. It is against this background that export credit agencies developed. The primary function of export credit agencies is to remove or reduce these uncertainties and risks, or at least to shift them away from exporters and their banks. Two of the principal mechanisms by which they do this are supplier credit and buyer credit.

Supplier Credit

The traditional and most straightforward model of an export credit facility is called supplier credit, or more precisely, supplier credit insurance (Figure 4). In this model the exporter contracts to export goods and services to the importer, and any credit terms are included in the sales contract. The export credit agency then sells the exporter insurance against some of the risks that the importer will not pay. These usually include both commercial risks (default or insolvency of the buyer, etc.) and political risks (inability to transfer foreign exchange, war, government action, etc.). In an extension of this model, the exporter may assign the benefits under the insurance policy to its bank, as security for the bank advancing the funds (Figure 5).

Figure 4. Supplier Credit Insurance

Figure 5. Supplier Credit Insurance with Assignment to a Bank

In certain circumstances bank A might prefer for various reasons to buy insurance dir...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents Page
• Preface
• Acknowledgments
• Overview
• 1 Introduction
• 2 The Development of Export Credit Agencies
• 3 The Changing World of Export Credit Agencies
• 4 Export Credit Services for Small Exporters
• 5 Export Credit Agencies at a Watershed?
• Appendices