World Bank advises State Bank to revisit export credit schemes

Published August 15, 2020
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

Opinion

Editorial

The fall guy
Updated 18 Aug, 2022

The fall guy

Maryam’s public distancing from Miftah over recent fuel price hike is quite uncalled for.
Never-ending scourge
18 Aug, 2022

Never-ending scourge

POLIO eradication efforts in the country appear to have suddenly taken a giant leap backwards. A day after...
Frozen Afghan funds
18 Aug, 2022

Frozen Afghan funds

WITH Afghanistan facing a humanitarian catastrophe and economic collapse, the American decision to not release ...
No end to hostility
Updated 17 Aug, 2022

No end to hostility

It is time for all parties to rise above petty tactics and hostilities for political gains and pull country back from brink.
Deadly accidents
17 Aug, 2022

Deadly accidents

TWO horrific accidents on Tuesday, which resulted in high death tolls, illustrate the dangers people face while ...
New banknote
17 Aug, 2022

New banknote

PAKISTAN has a new currency note to mark the diamond jubilee of independence. The 75-rupee banknote, issued by the...