KARACHI, March 3: The State Bank on Thursday announced up to 2 percentage points increase in the export refinance rate under the scheme for long term financing of export oriented projects.

The Banking Policy Department of the central bank issued a circular to all banks and DFIs informing them that the refinance rate for borrowings up to two years would be 4 per cent from March 1, 2005.

The circular said that for borrowings of more than two years but up to three years the refinance rate would be the same i.e. 4 per cent but for borrowings of more than three years but up to seven and a half years the rate would be 5 per cent.

The circular made it clear that the banks and DFIs involved in disbursement of long term export finance would be allowed to earn a maximum spread of 3 per cent on financing provided by them in all the three tenures.

This means that exporters would get export financing for their export oriented projects at 7 per cent for up to two years and three years and at 8 per cent for upto seven and a half years.

When the central bank had announced the scheme for long term export financing in May last year, it had fixed the export refinance rate at 2 per cent for borrowings up to two years, at 3.8 per cent for borrowings up to three years and 4.9 per cent for borrowings up to seven and a half years.

So, this time the central bank has made the biggest increase of 2 percentage points in the export refinance rate for borrowings up to two years. Thus, the exporters who used to pay a maximum markup of 5 per cent on long term export financing for up to two years would now pay 7 per cent.

This increase had become inevitable to avoid distortion in the interest rates structure. The maximum markup on short term export finance, which is availed for up to six months, has already reached 6 per cent this month as the central bank has increased its export refinance rate to 4.5 per cent. (Banks can charge a maximum spread of 1.5 percentage point over it).

This rate of markup would keep rising in the months to come as the central bank is set to increase further the yield on six-month treasury bills to which the short term export refinance rate is tied up.

The State Bank of Pakistan has been increasing the T-bills rates in all tenures to fight soaring inflation that averaged at 8.76 per cent year-on-year in the first seven months of this fiscal year, against the revised full year target of 7 per cent.