International Trade Finance and Emerging Market Economies - An Investigation into Nigeria
Abstract
This study investigates the impact of international trade finance on emerging market economies, with a focus on Nigeria. The specific objectives of this research were to: investigate how letters of credit affect the balance of trade; examine the impact of bills of exchange on the balance of trade; ascertain how direct lending facilities affect the balance of trade; and investigate how export-stimulation funds affect the balance of trade. To meet these objectives, the vector error correction model (VECM) was employed to assess the relationships between international trade finance and emerging market economies. The findings revealed that, in the long run, the effects of letters of credit on Nigeria's balance of trade were not statistically significant. Similarly, the effects of bills of exchange on Nigeria’s balance of trade were non-significant in both the long and short run. Conversely, the long-run impact of export-stimulation funds on Nigeria’s balance of trade was significant, whereas the short-run effect was non-significant. Based on these results, the study recommends that the government use letters of credit (LCs) to reduce risk and reassure commercial partners, as certain product exports are more resilient during periods of uncertainty. The Central Bank of Nigeria should enhance its export bills of exchange capabilities through NEXIM Bank to support deposit money banks (DMBs) in assisting exporters with pre- and post-shipment finance. Additionally, the government should revamp and expand exporters' access to low-interest loans to provide more opportunities for growth and greater competitiveness.