KARACHI, May 10: The textile sector, which received record Rs328 billion subsidised loans in 10 months, caused excess liquidity, distorted the tightening of monetary policy, resulted in money growth much higher than the target and chewed the State Bank’s profits, a source of revenue for the government.

The textile sector, which failed to boost exports resulting in record widening of trade deficit during July-April 2007, consumed huge subsidised loans. The State Bank has to bear the cost of subsidy.

Information provided by the SBP on Thursday said the total gross disbursement from refinancing facility allowed to banks during July 2006 to April 21, 2007 under Export Finance Scheme (EFS) and Long-Term Financing for Export Oriented Projects (LTF-EOP) is estimated to be Rs328 billion, of which EFS flows were Rs284 billion.

The textile sector has been asking for more incentives to increase exports. However, the State Bank being a close watcher of the sector said the incentives and funding provided to the textile sector has been large and significant.

The SBP identified serious consequences of the huge incentives being provided to the textile sector as well as the record high-level refinancing support ever provided to the sector.

The SBP said the financial sector offers fairly competitive financing to textile industry and “real interest rates in the country are lower than its regional and competitive partners.”

“This has been further confirmed by an independent report of a consultant hired by the government,” said the SBP.

The record high-level refinancing support, being a creation of new money, has an impact on growth of high-powered money.

Growth in textile refinancing (LTF-EOP) of Rs43.8 billion for July-April 2007 (compared to Rs.6.7 billion for preceding year) has accounted for 29 per cent of the reserve money growth, which along with exceptionally high government borrowing for budgetary support, has resulted in money supply growth of 16.5 per cent on an annualised basis. This exceeds the annual money supply target of 13.5 per cent.

The SBP said refinancing has resulted in central bank paying approximately Rs2 billion interest rate subsidy to commercial banks, which along with Rs16.4 billion subsidy on textile sector as Research and Development (R&D) support, will reduce SBP’s profit transfer by an equivalent amount.

“The State Bank’s profits lately have been an important source of revenue for the government,” said the SBP.

“The excessive refinancing in the current fiscal year has diluted the SBP’s monetary tightening stance,” said the central bank.

The excess liquidity is now finding its way back to the government securities in different Treasury Bills auctions/Open Market Operations and distorting the overall monetary policy implementation.

“The excessive refinancing and liquidity generated by it is distorting incentives for commercial banks’ deposit mobilisation effort,” said the SBP.

Currently, the financing facilities to exporters under the Export Finance Scheme (EFS) are being offered for a six-month period at 7.5 per cent, which is around 3 per cent below six-month Karachi Inter Bank Offered Rate (Kibor), and facilities for import of eligible machinery for a period of up to 3 years under SBP’s scheme for LTF-EOP are being offered to exporters in the range of 5 per cent below the Kibor of relevant maturities.

Similarly, financing facilities under LTF-EOP for up to 7-1/2 years are available to exporters at 7 per cent.