US offering credit guarantee to import its agriculture produce

The US is offering favourable terms to hook foreign companies towards its agricultural produce as part of the Trump Administration’s push to increase exports.

An increasing number of American farmers struggled to make ends meet in 2019 as trade tensions added to a range of growing challenges in the sector, from severe weather to low commodity prices.

There were 595 Chapter 12 farm bankruptcies filed last year, according to court filings reviewed by the American Farm Bureau, up 20 per cent year-on-year.

To encourage financing in Bangladesh to purchase American agricultural products, the US will provide credit guarantee under a scheme, said the US Department of Agriculture (USDA) in a seminar organised in cooperation with the Association of Bankers, Bangladesh (ABB) at the American Centre in Dhaka yesterday.

Bangladesh is one of the 130 countries eligible for the programme.

By reducing financial risk to lenders, credit guarantees encourage exports to importers in countries — mainly developing countries — that have sufficient financial strength to have foreign exchange available for scheduled payments, the USDA said.

The programme will facilitate stronger agricultural trade with Bangladesh, said JoAnne Wagner, deputy chief of mission of the US embassy in Dhaka.

“Bangladesh is already a top export market for US agriculture and there is clear potential to expand our trading relationship even further to the benefit of both countries.  This programme will help us do so.”

The country is already the 13th largest market for US soybean and 6th largest market for US cotton, according to Wagner. In return, Bangladesh exports garment to the US, which is the sector’s single biggest export destination.

“We think there is great room for cooperation between the two counties in the agricultural sector and the export credit guarantee programme is created to help us realise that kind of potential. This programme can reduce the financial risk associated with trading,” she added.

The credit guarantee scheme benefits US companies, financial institution in importing countries and importers, said Maria R Dorsett, agricultural marketing specialist at the USDA.

Foreign financial institutions benefits from access to US dollar financing with the correspondent US financial institution. They can borrow US dollars at potentially reduced interest rates, Dorsett said.

And because of reduced risk, banks now can give cheaper interests rates or give more favourable terms.

The USDA also said that it provides a 98 per cent guarantee on the principal payment from non-American financial institutions.

Under the scheme, a US exporter will have to establish a sales contract with a buyer and then apply for a guarantee. Then, the importer obtains a letter of credit to cover the sale before the exporter assigns the guarantee to an American bank.

“Goods are shipped and a US bank pays the exporter. The foreign bank will then make a payment to the US bank,” Dorsett said.

US exporters will bear 2 per cent of the risk under the export credit guarantee scheme and will only receive the initial payment upon delivery of their products.

The importer can make the rest of their payments over time, she added.

To avail the export credit guarantee, non-American banks are initially required to apply to the USDA to become eligible for the programme.

If any importer is interested, they should consult a local bank, which is approved for the programme.

The USDA offers $5 billion in credit guarantees worldwide each year under the programme.

This policy guarantees payment on purchases of American food and agricultural products.

Participating local banks can access dollar financing for up to 12 months from US banks at potentially lower interest rates, said the US Embassy in a press release.

“We hope multiple banks in Bangladesh will apply for enrolment in the program,” said Tyler Babcock, agricultural attaché at the US Embassy in Dhaka.

The financing costs for imports from the US might be cheaper if firms go through local banks approved for the scheme, said Ariful Islam, assistant vice-president at Bank Asia.

Elisa Wagner, financial analyst at USDA, and Shah Md Ahsan Habib, director of training at the Bangladesh Institute of Bank Management, also spoke at the event.