An EU trade initiative is not expected to meet its goal of funnelling 25% of its funding to the least developed countries (LDCs) by 2030, due in part to challenges SMEs face when accessing private sector funds, the bloc’s independent auditor has found.
The European Court of Auditors (ECA), which checks that EU funds are collected and used correctly, and aims to help improve financial management, says the share of Aid for Trade funding reaching LDCs has fallen rather than increased.
The proportion of grants and concessional loans allocated by the EU and its member states to LDCs declined from 18% between 2010 and 2015 to 12% in 2022.
Overall, they handed out €17.2bn to LDCs between 2017 and 2022, versus €105.8bn for other developing countries.
In a report released on September 16, the ECA notes that although the EU updated its strategy in 2017 to address the needs of LDCs, the 25% funding target “never translated into an operational action plan”, leading to a lack of progress towards the goal.
“The European Commission has not carried out any detailed analysis of the reasons for this decline in the least developed countries’ share, even though such analysis would make it possible to plan corrective measures,” it says.
Bettina Jakobsen, the ECA member in charge of the audit, says it is “very unlikely” the EU will meet its 25% funding target by 2030.
“The reasons for this will need to be thoroughly examined,” she says. “On this basis, it should then be reassessed whether the target is still appropriate, and whether an action plan with specific and realistic milestones should be drawn up.”
The auditor adds that the European Commission’s reporting of Aid for Trade’s results and impact has improved, but remains incomplete.
It has called for better coordination between EU delegations at a country level and their regional counterparts so that support aligns with the specific needs of individual countries.
Barriers to access
The Aid for Trade initiative was originally launched in 2005 and includes building capacity and infrastructure to support trade, as well as helping countries to develop more robust trade strategies.
One of the factors behind the low allocation could be the difficulties LDCs have in accessing “innovative financing” and leveraging private sector funds, the report suggests.
“The strong emphasis on private sector investment of the Global Gateway [a strategy to invest in global infrastructure projects] could only worsen the situation in the coming years,” Jakobsen said during a press briefing.
One example given in the ECA’s report shows that commercial banks are reluctant to be involved in Aid for Trade schemes in Malawi “because they do not want to take risks with clients not exporting and not working with foreign currencies”.
Although the Kulima Access to Finance project was intended to help smallholders and SME agribusinesses participate in the country’s wider value chain, local commercial banks only gave loans to large clients they had worked with previously.
The audit examined nine projects in Rwanda, Malawi, Angola and Cambodia from 2017 to 2024.
While these were successful and contributed to increasing the countries’ trade potential, the ECA says there is a risk that the countries will not be able to sustain the results.
“The projects we examined generally delivered the planned outputs, but their economic sustainability was at risk, and countries may struggle to capitalise on their results,” Jakobsen said at the briefing.
While cross-border trade can help developing countries grow and alleviate poverty, the least developed countries face barriers such as weak business environments, poor infrastructure and expensive financing.
A total of 44 countries are currently classed as LDCs, representing around 880 million people. The majority, 32, are in Africa, while eight are in Asia, three in the Pacific and one in the Caribbean.
LDCs account for just 1% of global exports and more than three-quarters of their population live in poverty.
The challenge of supplying trade finance to developing countries has long been an issue for the sector.
Earlier this month, GTR reported that the global shortfall in supply of trade finance has remained steady at US$2.5tn.
This figure represents the gulf between the supply of trade finance from banks and other financial institutions and demand from companies that need financial products to support their trading activity – particularly SMEs in developing countries.
Last year, research from the World Trade Organization found that around half of trade finance applications from smaller businesses are rejected by lenders, and facilities that are granted can cost more than double those provided to larger companies.
