LAHORE: The State Bank of Pakistan’s Temporary Economic Refinance Facility (TERF) will raise the investment-to-GDP ratio by almost one per cent during the ongoing fiscal year despite the Covid-19 pandemic as approvals of long-term concessionary investment loans under it have already reached Rs430 billion.

The central bank had introduced the concessionary refinance scheme to facilitate investment in new industrial projects, as well as capacity expansion and replacement of old technology by the existing ones. “The key purpose of TERF was that we didn’t want our businessmen to postpone their investment decisions during the pandemic. We wanted to provide them incentives to not postpone their [planned] investments,” SBP Governor Dr Reza Baqir explained during an interview with Dawn recently.

“When a crisis like (the) Covid-19 strikes, one of the immediate consequences is that there is uncertainty. There’s uncertainty on the part of everybody, especially on the part of the businessmen because they have to take a decision on the basis of their expectations of the future. And if that expectation about future has more uncertainty the natural instinct is to delay the decision,” he elaborated.

The long-term financing on a fixed rate of 5pc is available to all sectors of the economy except the power industry for 10 years (with a grace period of two years) through banks and DFIs. The loan limit under TERF has been fixed at Rs5bn per project. The scheme, which was initially announced only for new projects, is valid until end of this month, which implies that letters of credit (LCs) established before March 31, but retiring even after are eligible for financing under TERF.

Cheaper money facilitates investment decisions in pandemic; LCs worth over $1bn have been opened

Dr Baqir pointed out that the scheme was well targeted for investment as opposed to consumption. “Investment generates output for years to come; it means you get financing only if you open an LC (to make it hard to abuse the scheme).”

Further, he said, the credit decision is made solely by bank/lender without any political interference. “The banks have to ensure that they’re lending to a client where they are satisfied that they will be repay the bank on time just like is the case with any other loan.”

In the early days, investors didn’t show much enthusiasm owing mainly to uncertainty created by the coronavirus lockdown restrictions imposed in the country and a halt in international trade as countries across the globe closed their borders to slow down spread of the disease.

Nevertheless, the SBP, in order to further sweeten the initiative for investors reduced the end user rate from 7pc to 5pc, allowing TERF financing also for capacity expansion and balancing, moderanisation and replacement (BMR). The additional incentives and economic recovery seen after the lockdown curbs were lifted are said to have contributed largely to its success.

According to the SBP data up to Feb 18, the requests received by banks/DFIs for TERF financing have jumped almost 20 times from Rs36bn at the end April last year to Rs742bn. The loan amounts approved has also increased from Rs500m to above Rs430bn. “The information in front of you shows that the purpose for which the scheme was introduced has been met and we are successful in avoiding postponement of investments decisions,” Dr Baqir said. “The borrowers have so far established LCs worth $1bn and many payments have already been made.”

A breakdown of the approved loans indicates that 30pc TERF financing has gone directly into new projects while the remaining amount is being used for expansion/BMR through new investment. The textile industry has emerged as the largest borrower with almost 50pc share in the overall approved financing followed by FMCG (Fast Moving Consumer Goods) and auto sector with 11pc each. The data shows that at least Rs58bn has so far been disbursed under TERF.

No extension beyond March 31

The appetite for long-term, concessionary financing can be gauged from the very fact that the banks/DFIs had received requests for TERF loans of Rs687.4bn by Jan 28 with more investors still showing applying for credit under this scheme with widespread calls from business association for an extension in the deadline or its replacement with another similar refinance scheme. However, the central bank doesn’t appear in a mood to oblige.

“When we introduced this scheme we made it clear that it will be available for one year. This meant that LCs have to be opened by end March. The whole purpose was to not delay investment and that is why we came with a deadline,” Dr Baqir argued.

With a lot of TERF financing for industrialisation going towards import of machinery, the SBP was also a bit concerned and wanted to ensure that it doesn’t have too much ‘bunching’ of demand on imports bringing further pressure on the country’s balance of payments. “So we, with the amounts approved under TERF and what we’re expecting before it ends, are comfortable with the import demand it’s going to generate and the positive development we’re seeing in exports and remittances. We shouldn’t want to overdo it,” he argued.

He brushed aside a suggestion that the SBP was not interested in continuing TERF or bringing in its replacement because of the revival of the suspended $6bn loan deal with the IMF. “…In its most recent review, the fund praised SBP actions taken to counter the impact of the Covid-19 crisis. Our fiscal position constrains our ability to give (too much) stimulus… It is the responsibility of the central bank that whatever actions and measures we take, are in line with our objectives.”

Banks resume long-term loans

Dr Baqir agrees that the success of TERF underscores the presence of appetite for long-term project financing. “There’s a lot of appetite. One of the side products of TERF is that banks are coming back to the business of providing long-term financing. This is something banks had not been doing for a long time. Since they have restarted to do this, there is good reason to expect even after TERF they will be doing some of this lending from their own balance sheets.

“Even if a client with whom they have ongoing relationship gets some funding under TERF and some non TERF, still the average weighted cost that is borne by the client to borrow would have been much lower than it would have been otherwise. It means TERF may end but bank lending for project finance may not end because they have restarted this business…”

Published in Dawn, March 2nd, 2021

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