January 25, 2002	Friday	Ziqa’ad 10, 1422

KARACHI, Jan 24: Exporters may get export finance from banks at 8.5 per cent in February instead of 9.5 per cent — thanks to a huge cut in the treasury bills yield on Wednesday.

Sources close to the State Bank told Dawn that SBP was likely to reduce the export refinance rate from 8 to 7 per cent next month thereby allowing the banks to offer export finance at 8.5 per cent.

Export finance rate is the rate at which banks lend money to the exporters under export finance scheme and export refinance rate is the rate at which they get reimbursement from the SBP.

The SBP fixes monthly export finance rate at a level equal to the weighted average yield of six-month treasury bills in the preceding month. The central bank allows banks to offer export finance at a rate 1.5 per cent higher than the refinance rate.

It was because of this arrangement that banks kept charging 9.5 per cent interest on export financing in January for they were getting export refinance at 8 per cent. Now as the central bank is ready to cut its refinance rate to 7 per cent naturally the export finance would be available from banks at 8.5 per cent.

Sources close to SBP say what has made it possible for the SBP to cut export refinance rate to 7 per cent in February is a sharp fall in treasury bills yield this month. The central bank held two auctions of T-bills in January — the first one on January 10 and the other on January 23. It reduced the weighted average yield on six-month T-bills by a mere 16 basis points to 7.76 per cent on January 10. But on January 23 it slashed the yield by a huge 1.42 percentage points to 6.34 per cent. Thus the weighted average yield of six-month T-bills in January would be equal to 7 per cent {(7.76+6.34)/2}. Banks would add to this a 1.5 per cent spread and offer export finance at 8.5 per cent.

Since April last the State Bank has linked the export finance rate to treasury bills rate on the insistence of the IMF that wanted the subsidy on export finance to go. Uptill November last the export finance rate used to be fixed at 1.5 per cent above SBP refinance rate that had to be equal to the weighted average yield of six-month treasury bills in previous quarter.

But from December the SBP started fixing the rate on monthly basis to make it more market-oriented and to pass on the benefit of a sharp reduction of treasury bills yield in Oct-Nov.

As a result export finance rate fell by 2 percentage points to 10 per cent in December last and then declined by 50 basis points to 9.5 per cent in January 2002. The sharp fall in treasury bills yield this month may lower it further to 8.5pc next month.

Pakistan has promised to the IMF that while phasing out the subsidy from export finance rate the SBP would set the refinance rate at a level equal to the average six-month treasury bills rate of the preceding month with the banks free to set the rate for their consumers. “That has not happened as yet,” said treasurer of a large local bank. “By asking us to charge a maximum spread of 1.5 per cent on the export refinance fixed by the SBP the central bank has denied us the right to set the export finance rate on our own.” No official word is available on whether the banks would get this liberty — and if so when?

Despite a progressive cut in export finance rate the exporters have not been able to raise exports to the desired level mainly because foreign buyers have switched their imports partly from Pakistan to other nations after September 11 attack on the US followed by the US-led crackdown on Afghanistan. Commerce Minister Abdul Razak has said that the exports may reach $9 billion during this fiscal year. (The target set earlier was $10.1 billion). In the first six months to December last, exports totalled $4.45 billion.