Project description
This summary covers a proposed framework arrangement with the private sector arm of the Inter-American Development Bank Group, IDB Invest, in order to support trade finance transactions conducted through state-owned banks in joint member countries in Latin America and the Caribbean (LAC). MIGA would provide IDB Invest with up to US$500 million in trade finance guarantees (TFGs) covering the non-payment risk of eligible state-owned banks (SOBs) for which IDB Invest’s Trade Finance Facilitation Program (TFFP) would issue payment guarantees or short terms loans specifically related to trade transactions. The proposed TFG facility would have a tenor of up to 6 years (with an initial 3-year term).
Environmental Categorization
The MIGA-covered facility will support short-term trade transactions in the LAC region. These transactions pose minimal environmental and social (E&S) risks and impacts and as such, the project has been categorized as ‘FI-3’ in accordance with MIGA’s Policy on Environmental and Social Sustainability (2013). The applicable E&S requirements for this project are the MIGA Exclusion List and compliance with applicable E&S host country laws. The SOBs will also be required to comply with the labor requirements specified under MIGA Performance Standard 2: Labor and Working Conditions.
IDB Invest’s TFFP has an E&S risk management process for trade transactions which includes an assessment of each SOB’s E&S process and labor practices. IDB Invest’s application of E&S requirements and contract obligations for SOBs are considered aligned with MIGA’s requirements for SOBs regarding E&S matters.
Development Impact
The Project is expected to provide capacity to IDB Invest as it seeks to mobilize trade financing for exporting and importing companies in LAC, supporting their internationalization, and ensuring liquidity in times of volatility and uncertainty. Trade credit and finance are essential to the economic health of developing countries as it contributes to their export competitiveness, employment, and growth. Despite the benefits, according to the Asian Development Bank (ADB)[1], the global trade finance gap is estimated at US$1.5 trillion of which US$350 billion is in LAC. Access to trade finance in the region is particularly difficult for Micro, Small and Medium Enterprises (MSMEs) which are a key source of employment. The IDB Invest, through the TFFP, has been helping close the trade finance gap in the region, and since 2020, is working to increase its focus on various thematic areas that contribute to the Sustainable Development Goals (SDGs)[2] such as SMEs, green finance, women-led companies, and food security, to which the MIGA guarantee will contribute to.
The proposed Project aligns with the World Bank Trade Strategy 2011-2021, by contributing to the facilitation of trade finance (pillar II), and by promoting greater inclusion (pillar IV). The facility is also expected to remain aligned with the upcoming WBG Trade Strategy 2022-32 which will help developing countries to find new ways to support the private sector and their workers in adjusting to the Green, Resilient and Inclusive Development (GRID).
The Project is also aligned with MIGA’s FY24-26 Strategy and Business Outlook as trade finance is a new product innovation for MIGA and will likely be consistent with the strategic focus of ensuring inclusive growth as it has the potential to support underserved groups. Furthermore, the Project responds to the recent four-year partnership agreement signed between MIGA and IDB Invest to mobilize more private sector capital in LAC to finance development projects by working together to deploy de-risking and financing solutions in the region.