World Bank advises State Bank to revisit export credit schemes

Updated 15 Aug 2020

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Despite delivering net benefits, SBP's schemes entail a substantial financial cost to the central bank, says World Bank study. — AFP/File
Despite delivering net benefits, SBP's schemes entail a substantial financial cost to the central bank, says World Bank study. — AFP/File

ISLAMABAD: Evaluating the Export Finance Scheme (EFS) and Long-Term Finance Facility (LTFF) for plant and machinery offered by the State Bank of Pakistan (SBP), the World Bank on Friday said that despite delivering net benefits, the schemes entail a substantial financial cost to the central bank.

Based on cost-benefit analysis, a study carried out by the World Bank advised the SBP to reassess the re-financing rates it offers to commercial banks with a view to make these schemes more cost-effective.

The study pointed out that lending at negative real interest rates is costly and distorts the allocation of credit at aggregate level, and suggested that the schemes should be open to all sectors of the economy if these are to be made more impactful.

In particular, new or existing firms that are diversifying into new markets or products, can benefit more from the facility of access to export finance. The SBP should prioritise new ventures in allocating funds because they could be more efficient than continuing to lend to established exporters, the study suggests.

It also notes that Pakistan offers a very interesting laboratory to investigate the effect of subsidised credit for exporters. While the country’s exports have grown faster than the world over the last 30 years, Pakistan has experienced a notable deceleration after the 2008 financial crisis and has lagged relative to its peers in South Asia.

The EFS and the LTFF are export finance support programmes offered by the SBP to provide access to finance liquidity needs in the short term and investment in machinery and equipment in the long run for exporters.

The schemes are large and well established in the country. The EFS, which began in 1973, provided loans worth $3.8 billion per annum between 2015 and 2017, or 17.4 per cent of Pakistan’s total exports. While the LTFF is recent and smaller in size than EFS, the scheme’s outstanding loans are equivalent to 1.3pc of the country’s exports over the same period.

Using a matching estimator to control for the non-random selection of firms into the export finance support schemes, the study finds that both the EFS and LTFF generate a positive and substantial impact on export value of firms participating in the schemes.

The EFS led to a seven percentage points increase in the growth rate of exports among treated firms, while the LTFF generated an increase in the same performance indicator of between 8.7 and 11.2 percentage points.

However, the study did not find evidence on whether the EFS or LTFF affected growth rate in the number of products exported or the number of foreign markets reached by firms participating in the schemes.

The availability of export finance is crucial for the export sector to thrive and grow. Due to a longer production process and lag between production and delivery of goods and services, firms involved in international trade are particularly dependent on export finance for their working capital needs.

In addition, with export markets being relatively more sophisticated and competitive than domestic ones, keeping up with global demand requires constant investments in technology upgradations.

Published in Dawn, August 15th, 2020