Trade finance loans help Pacific businesses address the region’s trade imbalance through exports.
Most Pacific island countries are import-led nations. Finding ways to boost and stimulate exports, to help restore trade imbalances and grow local industries and employment opportunities, is therefore key.
But this is easier said than done – especially in a region that is far removed from major markets.
Take cocoa for instance, which Samoa has a long tradition of growing. The industry went into decline from the 1960s and 1970s onwards due to lack of investment, damage to crops from tropical cyclones, and volatile worldwide cocoa prices.
Half a decade later, though, new trends and opportunities are emerging.
Savai’i Koko, a local family-run cocoa business, grows and sells cocoa, and has worked hard to increase the quality of its beans for export. In 2015, the firm struck a major deal with Whittaker’s, a well known chocolatier from New Zealand.
Whittaker’s has developed a unique branding aspect for Samoan chocolate, known for its special flavors and which can now be found across all major supermarkets in New Zealand. This was a major success story for the revival of Samoan cocoa.
However, like all expanding businesses, Savai’i Koko’s financing needs have also grown – and this is where multilateral development banks like ADB can help.
Earlier this year, ADB, in partnership with Samoa Commercial Bank, provided a small export finance loan for Savai’i Koko to export a shipment of dried cocoa beans to Japan, a new market for the growing business.
Short-term trade finance is critical
ADB worked with Samoa Commercial Bank to develop the export loan product, and then provided the needed finance.
The loan was denominated in US dollars, matching the currency of the underlying trade payment, and the tenor was 90 days, matching the time between shipment and eventual payment from the buyer. This was something new for the local bank, which has traditionally only provided long-term local currency lending. But since trade is short-term and low-risk, loan products can be developed to reflect that.
Short-term trade finance is critical for local businesses in the Pacific, which need to be able to continue functioning with an adequate cash position while they wait to receive payment from overseas buyers.
Without access to this short-term finance, most companies would struggle to pay their bills and would not be able to arrange new shipments. Jobs and livelihoods would be at risk.
But if growing businesses do receive the support they need to expand, there are many positive knock-on effects.
For example, as Savai’i Koko has expanded, it has had to look beyond its own production of cocoa beans and source from elsewhere. Now, local smallholder farmers, many of whom only have four or five plants, supply about 40% of the beans. The company’s growth has thus provided livelihood support for local families.
The experience of Savai’i Koko in Samoa demonstrates that multilateral development banks have a role to play in filling market gaps in trade finance in every corner of the globe.
With sufficient support in the form of trade finance loans, Pacific businesses can realize their potential to become the ultimate drivers of growth and economic development in the long term. This, in turn, will contribute toward reversing the region’s trade imbalance.