KARACHI, Dec 15: Six-month Karachi inter-bank offered rate (Kibor) shot up to 6 per cent on December 15, from 2.97 per cent at the end of June, showing a huge increase of 303 basis points within five and a half months of this fiscal year.
This has raised the effective cost of Kibor-based borrowing for first class borrowers to 7-8 per cent, from 4-5 per cent at end-June. For others, the cost of such borrowing is even higher-ranging between 9-11 per cent, inquiries made at business houses reveal.
Six-month Kibor rose from 2.97 per cent at end-June to 3.48 per cent at end-July but then fell to 3.23 per cent at end-August. Later on, it moved much faster, rising to 3.94 per cent at end-September, to 4.52 per cent at end-October and finally reaching 5.72 per cent at end-November.
"This has increased the cost of borrowing accordingly," complains Mirza Ikhtiar Baig, a textile miller who also heads the banking committee of the Federation of Pakistan Chambers of Commerce & Industry.
"Banks normally charge 1-2 per cent over Kibor when they lend money to top businesses but others have to pay a much higher premium," he said. "So effectively, for many businesses the cost of borrowing is again in double digits."
To add insult to injury, the markup on concessional export finance has also risen from 3.5 per cent at end-June to 5 per cent for December as the State Bank has increased the export refinance rate from 2 per cent to 3.5 per cent during this period.
"This increase in export finance rate coupled with an even higher increase in Kibor-based borrowing from banks has increased the overall financial cost of exporters."
Naturally then, it is becoming increasingly difficult for them to remain competitive in international markets. This sounds truer for textile millers who are fastening belts to grab a larger market share after the lifting of textile quotas from January 2005. But keeping interest rates down in the interest of businesses including exporters seems next to impossible at a time when the central bank is tightening its monetary policy to contain soaring inflation.
Export refinance rate has gone up by 150bps after and six-month Kibor has increased by 303bps in the first half of this fiscal year as a result of this tightening. Export refinance rate, on which banks add up to 150bps to fix export finance rate, has risen because of the increase in the weighted average yield on six-month treasury bills to which it is linked.
The SBP has increased the six-month T-bills yield by 166bps so far during this fiscal year to fight inflation. Inflation has risen by 9.1 per cent year-on-year in July-November 2004.
On the other hand, Kibor has been on the rise also because the central bank has been soaking excess liquidity from the banking system to ensure that monetary assets do not grow too fast to fuel inflation further. But in so doing it has also ensured that the system remains liquid enough to meet the genuine demand for private sector credit, necessary to let the GDP rise by a targeted 6.6 per cent during this fiscal year, up from 6.4 per cent in the last year.
That is why the private sector's borrowing totalled Rs166 billion in a little less than five months to November 2004. In addition to containing growth of monetary assets, tightening of interest rates had become inevitable also to discourage hoarding of food items and large inventory building on the back of low interest rates as such practices are always inflationary. And, tightening of inter-bank liquidity and gradual increase in interest rates have been of much help in keeping the rupee stable that lost 5.5 per cent of its value in July-October this year.
All this sinks into the heads of most businessmen and exporters but worried as they are on rising financial cost of production and export, they want the economic managers to do something to keep it low.
"We want the central bank to de-link the export refinance rate from the T-bills yield," says Mr Baig without proposing an alternative but hoping it would slow down the increase in markup on export loans.
"This can be done now as the country has said goodbye to the IMF (export refinance rate was linked with six-month T-bills yield on the urging of the IMF to end interest rates subsidy on exports and to make them market-based)."
"We also want banks to link their lending rates with the deposit rates. That is, they must bring down their cost of financial intermediation and stop the habit of increasing lending rates faster than the deposit rate." Here Baig makes a more valid point.
The gap between lending and deposit rates stood as high as 528bps in October, unchanged from what it was in June. "This is too big a spread, banks must bring it down and the SBP must ensure that they do it."
