Fiscal policy and trade finance in emerging economies: Evidence from Africa

The paper examines how fiscal policy shapes trade finance in emerging economies with particular focus on Africa. In the past, the international trade finance market was thought to be liquid and efficient. However, it has recently gone through stressful times, most notably after the period following the 2008 Lehman crisis, necessitating quick structural adjustments. Given that trade finance makes up a growing portion of global trade, developing nations, especially those in emerging market economies in Africa, may be more concerned about its functioning. Nonetheless, a persistent trade finance gap across the continent, regulatory dissonance, exchange rate volatility, and macroeconomic instability are just a few of the intricate structural limitations that African economies must contend with. The paper shows that fiscal policy can address trade finance gap through government spending that directly reduces risk for private lenders, and through tax policy that improves the cash flow and profitability of trading businesses, making them more creditworthy. It further reveals that fiscal policy can also resolve trade finance constraints through macroeconomic stability and financial sector development.