KARACHI, June 30: The new fiscal year brings a full percentage point increase in mark-up on export loans — much to the chagrin of small exporters who cannot borrow from banks through other modes of financing.

The State Bank on Thursday told banks that it had increased the rate of export refinance to 7.5 per cent for July from 6.5 per cent in June. Accordingly, the banks can now make export loans at a maximum mark-up of nine per cent after charging a spread of one-and-a-half percentage points.

The SBP has raised the refinance rate by a full percentage point for July “on the basis of the weighted average yields on six-month T-bills during the preceding three months”. Earlier, this rate used to be adjusted “on a monthly basis with the movement of the weighted average yields during the preceding month,” SBP said in a press release.

But a nine per cent export finance rate for July would be higher than the weighted average lending rate of the banks during that month. And this makes exporters feel bad. “It is like the central bank wants to penalize exporters,” says A. Rahim Janoo, a member of the Federal Export Board.

The weighted average lending rate of the banks stood at 7.49 per cent in April this year and it will not rise beyond eight per cent in June. “So what is the point in increasing mark-up on export loans to nine per cent for July,” asks Mr Janoo.

Chaudhry Mohammad Saeed, chief spokesman for the private sector in Pakistan, said the increase in export finance rate would hurt the smaller exporters most. “Big business houses would continue to borrow against collaterals (other than bills of exchange) at an average rate of seven per cent or so. They would simply stop getting export finance,” said Mr Saeed, who heads the Federation of Pakistan Chambers of Commerce and Industry.

“But the small exporters would be in real trouble.”

The export finance rate after having bottomed out at 3.5 per cent in June 2004 kept moving on throughout the fiscal year 2004-05, as the SBP continued hiking the yield on benchmark six-month treasury bills to contain soaring inflation.

“From 3.5 per cent to nine per cent is a huge increase in the export finance rate within 13 months. That is going to hurt the exports growth,” fears Mr Saeed, who demands capping of the rate for six months.

He said capping of the export finance rate should not pose a big problem in terms of maintaining the interest rates structure because export finance constitutes a very small portion of banks’ overall private sector credit. (Between July 1, 2004 and June 11, 2005, the banks made Rs378 billion loans of which only Rs21.6 billion or 5.7 per cent was in the form of export finance).

Exporters say that a sharp increase in the rate of export finance is bound to force some of the exporters back out from their export pricing commitments and that can hurt the exports growth in the long-term.

The exporters are currently battling hard to boost exports in a more competitive environment after the phase-out of textile quotas from January 1. In 11 months of this fiscal year, Pakistan’s exports grew by over 16 per cent to $12.879 billion, brightening the prospects that the full fiscal year target of $14 billion would be exceeded. But during this period, imports increased at a much faster rate of 34 per cent to $18.391 billion, thus increasing trade deficit to $5.51 billion from $2.67 billion in a year-ago period.

So, Pakistan needs to achieve a decent exports growth rate in the coming years to narrow down the trade gap and improve its balance of payments without raising too much of foreign debt from the World Bank or the Asian Development or from private international investors.