01 August 2004	Sunday	14 Jamadi-us-Saani 1425

KARACHI, July 31: Six-month Karachi inter-bank offered rate or KIBOR moved up by 51 basis points to 3.48 per cent at end-July from 2.97 per cent at end-June this year.

Senior bankers say ix-month KIBOR that serves as benchmark for pricing loans to corporates went up in response to the gradual tightening of the monetary policy by the State Bank. In July the central bank increased the weighted average yield on six-month treasury bills by 45 basis points to 2.52 per cent from 2.07 per cent. It did so as part of a broad strategy to contain consumer inflation that had shot up to 8.45 per cent year-on-year in June.

The SBP jacked up the TBs yield the same day it announced its monetary policy statement for July-December 2004. The statement indicated that the rupee might weaken and interest rates might move up during this period.

The increase in six-months TBs yield has pushed up the export refinance rate to 2.5 per cent for August 2004, which means that eligible exporters can now seek export financing from banks at 4 per cent. (The banks are allowed to charge a maximum of 1.5 per cent spread over export refinance rate).

After keeping export refinance rate unchanged for 10 months till May the SBP had to raise it to 2 per cent in June in line with a similar rise in six-month treasury bills yield in May.

So the 50bps increase in export refinance rate in August means that export financing has become costlier by one percentage point within two months. This is bound to have a negative impact on the performance of exports during this fiscal year. The fact that the export financing may become more expensive in the months to come due to gradual hiking of TBs yield makes this scenario all the more likely.

When seen in this context a 51bps rise in six-month KIBOR in the first month of this fiscal year looks quite troubling for exporters as well as other businessmen. Banks are free to charge whatever spread they want over KIBOR while pricing their loans. Generally they charge minimum spread on KIBOR for first class borrowers and maximum spread for the borrowers with worst credit ratings. But business complain that some banks charge very high spread over KIBOR for majority of borrowers regardless of their credit ratings.

Says Mirza Ikhtiar Baig who heads the banking committee of the Federation of Pakistan Chambers of Commerce & Industry: "We have brought to the notice of the State Bank that at least one bank is charging 8-9 per cent spread over KIBOR."

But he hastened to add that banks normally charge 1-2 per cent over KIBOR for pricing their loans to first class borrowers.

Mr. Baig said a gradual increase in the export refinance rate coupled with a general upsurge in interest rates is bound to make Pakistan's exports less competitive in the world markets. "The worse part of the story is that the financial cost is rising at a time when the textile sector is in crisis due to falling cotton prices."

The textile millers who have raised loans from banks by using cotton stocks as collateral are effectively drawing lesser amounts of loans against their limits because of a 30 per cent fall in cotton prices. "In addition to that the prices of gas for industrial consumers have risen and the rising oil prices in the world market had also added to the cost of fuel for industries."

When seen in this background meeting the export target of $13.7 billion seems too difficult for Pakistan even if the State Bank allows the local currency to depreciate for benefiting the exporters.