KARACHI, June 10: An increase of half a percentage point in the export finance rate from this month will boost export borrowing in foreign currency.

The State Bank has raised export refinance rate from 1.5 to two per cent for this month and banks are allowed to charge a maximum mark-up of 1.5 per cent while lending money to exporters under the SBP refinance scheme.

This has pushed up the export finance rate for the first time in 10 months to 3.5 per cent. This has perturbed businessmen: many of whom want the banks to reduce their mark-up to keep the export finance rates at a low level. But there are others, seemingly more pragmatic, who have a piece of advice for their fellow exporters.

"Exporters should increase their export borrowings in foreign currency," says S.M. Muneer, former president of the Federation of Pakistan Chambers of Commerce and Industry. Mr Muneer, who is a textile and leather exporter and also has stakes in a major local bank, says that banks are offering foreign currency export loans at Libor plus 1.0-1.5 per cent. "But there are a few top companies that get these loans even at Libor plus less than one percentage point."Since a six-month Libor stands at 1.70 per cent the exporters can seek export financing from banks at 2.70-3.20 per cent, but in doing this they will be exposed to exchange risks.

More importantly with the latest increase of 25 basis points in the repo rate of the Bank of England, Libor itself will go up. "So exporters are going to get a double hit," says Dr Mirza Ikhtiar Baig, who heads the FPCCI banking sub-committee.

"Not only the export finance rate for rupee lending has gone up, but foreign currency borrowing of exporters will also now become more expensive." Expensive it will become due to an anticipated increase in Libor and disappearing advantage of borrowing in foreign currency because of the falling rupee.

The rupee has come under pressure owing to rising trade deficit and a fall in workers remittances and foreign private investment amidst prepayment of external debts by the government as well as corporates.

Dr Baig says whereas good exporters get export loans at Libor plus one per cent those not-so-good are often charged Libor plus 2-3 per cent depending upon their track record and financial health. But he still believes that the recent hike in the export refinance rate will compel many exporters to seek more of foreign currency export loans. That seems to be a likely scenario because rupee export loans are going to become more expensive in future because of a gradual hike in treasury bills rates.

The yield on six-month T-bills determines the export refinance rate, thus having an impact on the pricing of export loans. "So the SBP should now introduce a export refinance scheme also in foreign currency," suggests Dr Baig.

Under the scheme, the SBP should provide refinancing in foreign currency to the banks at a cheaper rate and allow them to charge a certain mark-up on it like they do in the rupee-based export refinancing scheme.