LAHORE, March 12: Rejecting out of hand a suggestion that higher cost of credit is hampering exports, State Bank Governor Dr Ishrat Hussain on Tuesday warned the government’s efforts to reduce Pakistan’s external debt to manageable levels by liquidating hard and non-concessional loans would “go down the drain if exports did not increase in three years”.

Speaking to businessmen here at the Lahore Chamber of Commerce & Industry, the SBP governor said Pakistan’s exports touched the mark of $8.5 billion in 1994-95 when the interest rates had gone up to staggering 21 per cent. However, the exports started declining to stagnate at $7.7 billion between 1996-99 while the cost of credit had significantly come down. “It was in spite of the fact that we disbursed Rs80 billion as export refinance at 7.5 per cent during 1999,” said Dr. Ishrat.

He said if the businessmen did not work hard to raise exports, the country would have to pay out of its foreign exchange reserves after three years. This would destroy all the efforts to make the economy strong and competitive, he added. He was “disappointed to note that the country’s exports could cross the $10 billion mark” despite potential for the same. He said he was aware of the fact that businessmen had to face problems and irritants in their way. But he urged them to work hard and increase exports by improving their quality and designs and exploring new markets. He said the country’s share in the international trade had decreased to 0.40 per cent from 0.22 per cent. “Even if we regain the old share, we would be able to increase our exports to $15 billion or so.”

Dr. Ishrat said the central bank had taken effective measures to bring down the interest rates by linking them with T-bills and discount rates. However, he added, the banks were faced with difficulty in slashing their rates on account of a “high intermediation cost of three per cent, a drag of three per cent because of non-performing portfolio and a very high tax rate on them, costing the banks some two per cent.” It’s precisely why the banks have a spread of 7-8 per cent.

However, he said, the government had already brought down rate of tax on banks from 58 per cent to 50 per cent and would further slash it in the next budget. Besides, the CIRC had been formed to wipe out bad loans from the balance sheets of the banks. Besides, the nationalized banks were being privatized. All these measures, he believed, would help the banks reduce the cost of credit.

The SBP governor said Pakistan would be able to liquidate its hard commercial debt by 2004 to slash it to $32-33 billion. “It’s also been decided not to borrow at commercial rates. In future, we are going to accept only soft-term loans need for income generating projects and schemes.” He was hopeful of getting $600- 700 million soft-term loan from the World Bank at zero interest rate, saying negotiations were underway in this connection.

Besides reducing debt, the government is also trying to foster GDP growth and increase foreign earnings. He added poor countries like Pakistan always need to have a debt-equity ratio to “sustain a good growth rate and rapidly raise per capita income.” However, the loans must be utilized efficiently to generate income, reduce the cost of doing business and attain a sustainable growth rate.

Dr Ishrat said he did not mind businessmen making money, but they should do so honestly without manipulating the rules through corrupt practices. “Bring your money back, invest it here so that the country also prospers with you,” he said. “We should not lose our economic sovereignty to outside powers. It’s not commensurate with our potential or pride,” he reminded the businessmen.

He also discussed the restructuring at the SBP, steps taken to boost the business confidence, get the bilateral debt written off or rescheduled, boost the small industry, make it impossible for the governments to freeze foreign currency accounts and build foreign exchange reserves.

“The money that has been saved by getting the debt rescheduled and written off is being spent on infrastructure building and provide fiscal space. The public spending this year has been increased by 40 per cent,” he said.

The governor said these were difficult times for the economy. “Unemployment is rampant and leading to social tensions. It is due to small size of the pie. Let’s expand the pie,” he stated.

He said the (prudential) rules and regulations for the SMEs were being changed to allow them access to credit. He, however, ruled out the establishment of EXIM bank in the public sector, saying he did not want to have another “drag” on the national wealth.

Dr Ishrat said the SBP was providing concessional export refinance through banks and other functions of an EXIM bank were being taken care of by other agencies like the PEFG.