Inefficiencies in local banking sectors may be one reason behind the low uptake in some emerging markets of schemes to encourage importers to buy US goods on letters of credit (L/Cs) guaranteed by US institutions.

Several institutions - including the Overseas Private Investment Corporation (OPIC), the US Department of Energy (DOE), the US Export Import Bank (Eximbank), and the US Trade and Development Agency - provide financial incentives to private companies in emerging markets to meet their import requirements.

Credit guarantees

The US Department of Agriculture (USDA) administers export credit guarantee programmes for commercial financing of US agricultural exports. These USDA Commodity Credit Corporation (CCC) programmes aim to encourage US exports to buyers in countries where credit is necessary to maintain or increase US sales, but where financing may not be available without such credit guarantees.

Two programmes underwrite credit extended by the private US banking sector (or, less commonly, by the US exporter) to approved foreign banks using dollar-denominated, irrevocable L/Cs to pay for food and agricultural products sold to foreign buyers. The Export Credit Guarantee Programme (GSM-102) covers credit with repayment terms from 90 days up to three years. The Intermediate Export Credit Guarantee Programme (GSM-103) covers longer credit terms up to 10 years.

Competitive terms

Under these programmes, the CCC guarantees payments due from foreign banks. Typically, cover at an adjustable rate is available for 98 per cent of principal and a portion of interest.

Because payment is guaranteed, financial institutions in the US can offer competitive credit terms to the foreign banks, usually with interest rates based on the London Inter-Bank Offered Rate (LIBOR). Any follow-on credit arrangements between the foreign bank and the importer are negotiated separately and are not covered by the CCC guarantee.

Variable uptake

Uptake of these programmes varies considerably across different markets. As of May 25 2001, GSM-102 allocations of about $4.0 billion for the financial year to September 2001 (FY01) had been announced to 23 countries and 11 regions, including the Baltic, Caribbean, Central America, Central Europe, China/Hong Kong, East Africa, South America, Southeast Asia, Southeast Europe, Southern Africa, and West Africa regions. Registrations totalled US$1.8 billion for exports to nine countries and four regions. It is possible, however, that a proportion of these registrations may not become actual transactions.

Some countries and regions have been big users of the programme. As of 14 September 2001 the Philippines had registered transactions worth US$98.2 million out of a total allocation of US$100 million while Indonesia had registered all but US$24.30 million of its allocated funds of $750 million. The Central American region had registered 100 per cent of its allocated US$200 million allocation.

At the other end of the scale, the US$300 million put by for China/Hong Kong remained untouched in FY01 during which countries such as Morocco and India had also completely ignored their smaller allocations of US$10 million and US$20 million respectively.

Reasons

A commentator from Ghana sheds some light on possible reasons why uptake of such programmes may be poor. In a report published by All Africa Global Media, Isabella Gyau Orhin suggests that Ghanian firms are missing out on opportunities to develop their businesses through international trade because importers "expect" suppliers to deliver on open account terms and often ask for very long periods of extended credit.

She is also scathing of Ghana's banking sector and suggests that financial institutions in the country "do not support clients" and are "just interested in day-to-day cash receipts, and making periodic loans to favoured clients."

Poor L/C availability

According to Orhin, another reason why Ghanian businesses are shy of international transactions is because L/Cs may be "very expensive" or "non-existent." This she suggests means that although they may be technically eligible, local companies and therefore the Ghanian economy are effectively unable to reap the benefits offered by programmes such as GSM-102 and GSM-103.

More information about these programmes can be found on the USDA web site at www.fas.usda.gov.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DCPRO.