Market Gaps and Risks in Developing Countries
The United Nations Conference on Trade and Development (UNCTAD) estimates that it will take between USD 5 to 7 trillion to achieve the Sustainable Development Goals (SDGs), with an investment gap of about USD 2.5 trillion in developing countries[1], leaving millions of people vulnerable. This makes increasing financial flows to developing countries essential for building resilience and addressing the underlying causes of instability and underdevelopment.
Developing countries are often characterized by limited financial resources and political instability, leaving citizens vulnerable and investors facing heightened exposure to a variety of risks, including conflict and political crises. With the low capacity of governments in these countries to mitigate, manage, or absorb these risks, the challenge to attract the much-needed private sector investment to overcome chronic underdevelopment can be significant, as these high levels of political risk deter foreign investors from investing in these environments.
Private sector investments are critical for developing countries. They help strengthen an economy’s resilience to shocks, drive structural transformation, support the development of SMEs, and build the necessary infrastructure to deliver crucial services such as water, electricity, and telecommunications. However, the less developed a nation is, the more risk is associated with doing business there and the less attractive it is to foreign investors.
One critical reason for the lack of private investment in developing countries is the high levels of political risk. A study by the Multilateral Investment Guarantee Agency (MIGA) found that investors cite levels of political risk as the single most important constraint for investing in developing countries over the medium-term[2]. Political risk covers a range of perils, including political violence, war, breach of contract, and foreign currency inconvertibility. The economic impact of the COVID-19 pandemic is magnifying these political risks because of increasing unemployment and widening inequality, putting critical investments at risk and threatening to undo many years of socio-economic development. The key tool for investors to manage these political risks is through the use of Political Risk Insurance (PRI), and the demand for PRI has naturally increased following the instability caused by the global pandemic.
ICIEC’s Role in Mitigating Risk through Political Risk Insurance
PRI is designed to meet the needs of investors and banks by providing protection against negative political impacts on otherwise sound commercial investments and is one of the many insurance products offered by ICIEC for its member countries. As foreign firms invest in OIC member countries they are often faced with new and unfamiliar environments with various risks and uncertainties. ICIEC insures against many of these risks, and its products allow firms to expand in higher-risk countries with otherwise attractive investment opportunities
ICIEC’s insurance products also mitigate the political risks involved in cross-border trade, providing support to exporters and banks, thus facilitating trade between member countries and the rest of the world. ICIEC also aims to facilitate and increase intra-OIC exports, encouraging businesses to take advantage of the diverse resources within the region.
ICIEC’s insurance is not only useful to firms seeking to access new markets but also for firms looking to increase exports and service delivery to their existing markets. Expansion in existing markets can also entail risks given the various economic, political, and social uncertainties, and the insurance ICIEC provides gives these firms the protection they need to expand their market share.
ICIEC’s risk mitigation services are especially crucial for developing countries, where market failures in regard to trade finance are known to be highest. ICIEC has provided much-needed PRI to its member countries that are classified as low Income and least developed through insuring various investments and trade transactions, and by supporting Issuing Banks to access international financial markets and build their trade finance capacity. Insuring transactions in developing countries ensures that businesses can execute their import or export transactions smoothly where foreign buyers or sellers might view them as high risk. ICIEC also provides much-needed insurance for financing large development projects, particularly in high-risk investment countries where mobilizing large sources of finance can be risky without adequate mitigants. PRI insurance is part of a larger effort by ICIEC to support the development goals of its member countries, especially those that are least developed, and to contribute to the global achievement of the Sustainable Development Goals (SDGs).
ICIEC’s continued support for export transactions and investments in risky markets through PRI and risk mitigation ensures that developing nations have access to quality essential health care services, various employment opportunities, upgraded infrastructure for modern and sustainable energy services, and access to finance for SMEs. At the 10th annual Global Islamic Finance Awards (GIFA) that took place on September 14, 2020, ICIEC was awarded “The Global Islamic Export Credit and Political Risk Insurance Award for 2020”. This award marks the fourth time ICIEC has received this accolade since its introduction in 2016, with previous awards occurring in 2016, 2017, and 2018 respectively.
Supporting Developing Countries through COVID-19
ICIEC also stands ready to support member countries through the COVID-19 crisis, employing new measures to help manage short-term challenges, mitigate risks, and develop foundations for long-term growth. ICIEC’s COVID-19 response to date includes USD 150 million for insurance coverage as part of the Islamic Development Bank Group’s ‘Strategic Preparedness and Response Facility’ (SPRF). The SPRF is helping to curb the spread of the virus, build resilience in member countries response to outbreaks, and minimize the negative health and socio-economic impacts of the pandemic, especially on the most vulnerable populations. In addition to the SPRF, ICIEC has also collaborated with IsDB on the innovate USD 2 billion COVID-19 Guarantee Facility, designed to support the private sector.
The Islamic Solidarity Fund for Development (ISFD), the poverty alleviation arm of the IsDB Group, has teamed up with ICIEC to create a rapid COVID-19 response and resilience initiative focused on import dependent and developing member countries. The ‘ICIEC-ISFD COVID-19 Emergency Response Initiative’ (ICERI) is helping member countries meet essential import needs of pharmaceuticals, healthcare equipment, agricultural commodities, energy commodities, and other crucial materials and resources necessary to combat the negative impacts of the pandemic.
ICIEC’s full suite of PRI and COVID-19 solutions are available to exporters, importers, and financial institutions in its member countries to ensure that supply chains are intact, investments are protected, volatility is minimized, and that the health and livelihoods of citizens are protected.
[1] UNCTAD. (2014). ‘World Investment Report 2014’. https://unctad.org/system/files/official-document/wir2014_en.pdf.
[2] MIGA. (2011). ‘World Investment and Political Risk Report 2010’.
