THE State Bank’s policy to tighten monetary expansion in the economy by hiking the interest rates to curb ever rising inflation has pushed hundreds, if not thousands, of medium-sized industries, especially export-oriented units, to the verge of closure, driving up their production cost and making it quite difficult for them to compete in the international markets.

In less than one year, the cost of export refinance has shot up to around nine per cent from a mere three per cent in March last year.

The cost of long-term commercial and industrial credit has also gone up from an average 4-5 per cent to upwards of 12 per cent, depending upon the bank and the borrower seeking financing.

In India, export refinance is said to be available at LIBOR plus 0.75 per cent, which works out to be 5.5-5.75 per cent. Similarly, the interest rate on long-term industrial, investment loans is stated to be 10 per cent.

With the Indian government offering five per cent subsidy on it, the effective rate of interest at which their industry is securing long-term loans stands at five per cent.

The hike in the interest rates has not only raised the financial charges but also added to the cost of inputs used by the manufacturers-cum-exporters. “Our production cost has risen by 5-6 per cent because of increase in the interest rates and the cost of inputs. It means we have become as much more expensive than our competitors – India and China and Bangladesh,” says leading knitwear garments manufacturer and exporter M.I. Khurram.

The State Bank began driving up interest rates as part of its policy to tighten expansion of money about a year or so ago on the pretext of countering the inflationary pressures in the economy.

“When the interest rates were low and we saw the opportunities coming our way after the abolition of quota restrictions, we borrowed huge funds from the banks and expanded our production capacities.

But our hopes were dashed when we found foreign buyers going either to China or India or Bangladesh and not coming to Pakistan for one reason or the other.

We were forced to sell our products at cheaper rates just to stay in the market and incur losses, hoping the situation would improve sooner or later and we told our bankers the same. And they believed us, and were ready to wait for some time.

However, the central bank’s decision to hike interest rates came as a rude shock to us all. It increased our financial charges at a time when we were not in a position to sustain any further increase in our cost. The result is over 90 knitwear unit around the country were forced to close down,” Pakistan Hosiery Manufacturers Association (PHMA) chairman Shahzad Azam Khan says.

Another knitwear exporter Nasir Abbas says some 30-40 per cent manufacturers had already approached their banks for rescheduling of their loans because they were not in a position to repay their loans in the present circumstances. “But the banks are resisting,” he says.

“The bankers are waiting for a policy decision.” “The ball is in the court of the government. If a decision is delayed, the government will have to perform a major surgery. I see hundreds of manufacturers and exporters defaulting on their bank payments in the next few months,” says Shahzad.

He says the six per cent relief allowed by the government in April last year is nullified as a consequence of higher-interest rate and inflation driven increase in the cost of production.

Khurram insists that higher financial charges leave the export-oriented industry uncompetitive and unviable. Hence, he says, it should not be linked to higher inflation. “We are not producing for the local market. Interest rates for industrial expansion or export must not be as high as for investment in real estate or imports or other commercial activities. We should not be treated at par with hoarders and profiteers or those who use loans for unproductive activities.

The industry should get loans at cheaper rates so that more and more industry is set up in the country, jobs are generated, and export is increased. It will discourage hoarders and also help the government bridge its budgetary deficit and curb inflation,” he says.

Productivity: According to him, inflation can best be countered through increased productivity. “To increase productivity, you need more and more investment in the industry so that surplus is produced and goods and products are available at cheaper rates. Present cost of finance discourages investment in the industrial sector. Creating shortage of money in the economy only leads to decrease in the industrial productivity.”

Nasir says the central bank’s policy at best is helping banks make huge profits at the cost of industry and exports. “Take a look at the balance-sheet of any bank. No bank is making less than 100 per cent profit. In comparison, the industry’s profit remains in single digits. Do you know any other country where such a thing is happening?” he asks.

He is of the view that a situation should be evolved in which both banks and the industry and exporters make money. “We don’t want the banks to lose money, but they should not prosper at our expense. If the industry does not perform, the banks should understand they would also suffer in the ultimate analysis.”

Nasir says “ the prices in international markets remain stable for quite a long time. The buyers don’t care if the gas prices in Pakistan have gone up. They are concerned with getting cheaper goods, and would look for other sources if we insist on passing on the impact on them. It is good that our currency is stable, but there should also be a way for us to hedge against inflation and interest rate hikes. Where is that? Instead, we have been burdened with higher interest rates, which most of us are unable to pay.”

In 2000, the knitwear exporters were selling a garment at an average price of $4. The price of a dollar at that time was Rs62. On top of that the exporters used get nine per cent rebate on it, which meant that they got reimbursed Rs68 for each dollar earned.

The knitwear exporters were hit badly when the government withdrew the rebate and also appreciated the rupee to Rs58 against a dollar. “In one go we suffered a loss of Rs40 per garment (with average price of a knitted garment at $4). Since then we have not been able to stand on our feet again,” says Nasir.

None of the exporters agree to the central bank’s policy of tightening monetary expansion to control inflation. “It has miserably failed so far, and resulted only in the sickness and closure of the industry and defaults,” says Khurram.

“Where were they (the central bank high-ups and finance managers of the country) when inflation was being fuelled? Why didn’t they take any corrective measure when their own policies (of easy monetary expansion) were fuelling inflation? It is wrong to stay put for two or three years and watch inflation to spiral, and wake one fine morning to hike the interest rates to the detriment of manufacturing and export. It is a reactive policy,” says an exporter, who does not want to be named.

Former Punjab finance minister Shahid Kardar agrees. He too believes that though petroleum and wheat prices had contributed to inflation as claimed by the former State Bank governor, the central bank’s own policies were a major factor responsible for it. “Had it not been so why inflation in India is still five per cent or so?” he wonders.

“It was a big mistake to allow this to happen in the first place and then try to control it in one year. It has affected the poor as well as the industry. Look at the knitwear industry. They have already closed down 90 units. The situation will take at least another two years to get corrected. This year is going to be very tough for the exporters, manufacturers, as well as those who had availed consumer finance for constructing houses, buy cars or acquire consumer durables.”

Khurram says the industry is already dying under the burden of higher financial charges. “Any further upward revision of interest rates in the coming weeks will prove to be a death knell for us.”