KARACHI, Nov 20: The State Bank is in a fix. Its officials are not sure how they will cut the export refinance rate next month. The exporters, on the other hand, are all waiting for this.

“We are naturally waiting for the refinance rate to come down in line with the discount rate cut,” said a former chairman of All Pakistan Textile Mills Association, Anwar A. Tata. Currently export refinance rate or the rate at which the SBP gives funds to the banks for onward loaning to the exporters is 6.5 per cent. The banks charge a spread of 1.5 per cent. So the exporters get export loans at 8 per cent.

The exporters are anticipating a cut in export refinance rate in the wake of a 1.5 per cent reduction in SBP discount rate last week. The discount rate cut normally leads to lowering of T-bills rates and that in turn brings down the export refinance rate that is linked with the weighted average yield of six-month treasury bills.

But since the SBP has not auctioned six-month bills after the 1.5 per cent cut in the discount rate, the official cut-off yield on the bills remains unchanged at 6.35 per cent. “So technically speaking, the SBP may not make any substantial cut in export refinance rate in December,” says head of credit of a big bank.

The issue gets complicated also because the central bank is not scheduled to auction six-month T-bills during this month.

“The SBP governor should take note of this anomaly and ensure a sufficient cut in export refinance rate in December,” Tata said when reached by Dawn over telephone. He said the current export refinance rate at 6.5 per cent was too high and was fast losing its utility. “When we can get export loans in foreign currency at 3.5-4.0 per cent why should we bother about export finance in rupee, which is available at 8 per cent,” Tata said. He was referring to trade loans being offered by the banks to exporters and importers out of the foreign currency deposits mobilized after the freezing of $11 billion deposits in 1998.

Tata and several other exporters feel it is time for the SBP to make rupee export finance more market oriented and let each bank determine its own export financing interest rate structure.

“Let the banks compete with each other. Let them quote their own rate of export financing,” Tata said. In a sense the SBP has already been doing this though there is still scope for making it more market-oriented. At present the export refinance rate is linked with the six-month T-bills rate and the banks are allowed to charge a maximum of 1.5 percent spread over that rate. “The banks are free to keep this spread as low as they can, but the cap is at 1.5 per cent,” head of credit of a foreign bank told Dawn.

No official word is available on how the SBP will cut down the export refinance rate next month. But sources close to the SBP say the issue may be sorted out at the highest level. “The governor may use his discretion to find a solution to this problem,” one of the sources said. He was implying that the SBP may either hold an out-of-schedule auction of six-month bills later this month or it may announce an outright cut in export refinance rate.

Here again the problem is that lately the SBP has been holding alternative auctions of six-month bills and three-month and one- year bills every fortnight. The next auction due is on November 27 — but for three months and one-year bills. The six-month bills were auctioned on November 13.

Secondly, making an outright cut in export refinance rate seems a tough task as the export refinance rate has been linked to the T-bills rate on the insistence of the IMF. Obviously, then the SBP may have to ask the IMF for a one-time relaxation on this score.

“Whatever may be the case we believe that the export refinance rate will be cut down next month,” said a source close to the SBP but he gave no idea about whether the reduction would be equal to the cut in the discount rate.