Rajashekara V. Maiya
The world is slowly returning to normal after the disruption caused by the COVID-19 pandemic, but the economy is still recovering from the pandemic’s slowdown. Previous crises, such as the Great Depression of 1930 and the Great Financial Crisis (GFC) about 15 years ago, were associated with structural vulnerabilities that took three to four years to recover from.
But even when economies recovered after the financial crisis of 2008/09, for example, world trade grew by 6.2% in 2011, 2.8% in 2012, 3% in 2013, and the well below the pre-crisis average of 7.1%. .
a very different crisis
The pandemic crisis is different in that it was triggered by a health crisis. During his two years, the global economy remained structurally unchanged. Global trade is therefore expected to quickly return to pre-corona levels. But it’s not easy. Covid-19 has caused unprecedented disruption to his chains of supply around the world. For example, the shortage of semiconductors has severely affected the technology manufacturing industry. Then the war between Russia and Ukraine further strained supply chains such as food and oil. Supply chain disruptions have hit trade perhaps more than any other area of business.
The silver lining is that the pandemic has triggered widespread digitization in all sectors and in all countries. This digital foundation will boost the growth of international and domestic trade, much like the internet and mobile did between 2014 and 2020 after the global financial crisis. One of the key enablers here is distributed ledger technologies (DLTs) such as blockchain and Ethereum. Gartner estimates that blockchain will generate an annual business value of US$176 billion by 2025 and a staggering US$3.1 trillion by 2030.
Solution for distributed ledger technology
DLT’s goal is to eradicate the friction in trade (and trade finance) transactions that hinders their growth. Actually this is not a new problem. Under the WTO, even in the 2001 Doha Round negotiations, he stressed the need to reduce friction in developing countries’ trade processes. Improvements have been made in the last 20 years, but they are small compared to the scale of change possible with DLT automating not only within an organization, but also at an inter-organizational, cross-country, and multi-country level. .
First and foremost, DLT eliminates two of the biggest pain points in the trade/trade finance process: excessive paperwork and long turnaround times. Apart from buyers and sellers, the entire ecosystem of providers is involved in conducting international transactions. Banks, shipping companies, warehouse companies, logistics companies, customs and certification bodies, to name a few. Interacting with each participant is manual, time-consuming and expensive. To name just one example, opening a simple documentary credit to finance the importation of goods can take weeks. Even an inland Letter of Credit (LC) can take 8-9 days.
Then there are the other documents, such as the cost, delay, and friction stack up in every transaction, from warehouse receipts to airline tickets. Problems range from lack of agreement on standard documents, to lack of process visibility, to the complexity of managing the bank’s supply chain and supporting the trade ecosystem. This is totally unacceptable in a world where other transactions are digitized, real-time and frictionless.
DLT eliminates most of these problems by moving all participants to a common decentralized platform. First of all, the platform allows participants to track the status of all transactions. In addition to transparency, distributed ledgers are immutable, so their data is highly secure and confidential. All transactions are recorded digitally so they can be seen by everyone, so there is no risk of loss, theft or rejection. That means it’s completely reliable.
MSME Booster Dose
In a pilot project in India, DLT reduced the time to issue inland LCs by 75%. As paperwork and timelines are reduced, costs are also significantly reduced. As a result, SMEs hesitant about the costs and paperwork of trade finance will seek financing and trade with confidence. This is a huge achievement for the world, with 60% of the country’s GDP and 60% of employment potentially coming from Micro, Small and Medium Enterprises (MSMEs). Unfortunately, the sector has been hit hardest by the pandemic crisis. His one way to get these companies back on their feet is to close the US$5.2 trillion trade finance gap.
From an Indian perspective, MSME funding is set to skyrocket, as is UPI-based digital payments, thanks to various government initiatives. Once established, the Open Network for Digital Commerce will democratize digital commerce and benefit over 100 million small businesses. Trading solutions built on blockchain and other distributed ledgers are infinitely scalable to provide a great starting point for any business. For banks and other ecosystem participants, DLT platforms offer a low-cost way to acquire and engage customers. Together, these changes will facilitate a post-pandemic trade recovery that all countries in the world want.
(The author is Vice President and Head of Business Consulting Group, Infosys FinacleExpression is personal. )
.
