KARACHI, May 31: All banks will charge a maximum markup of 3.5 per cent on export financing in June instead of 3 per cent as the State Bank has raised its export refinance rate from 1.5 per cent to 2 per cent after 10 months.

In August 2003 the central bank had fixed at 1.5 per cent the export refinance rate or the rate at which it makes reimbursement to banks against their lending to eligible exporters under its export financing scheme. As banks can charge a maximum spread of 1.5 per cent over the refinance rate exporters have been getting export advances at 3 per cent since then.

But on Monday SBP informed the banks through a circular that it has refixed the refinance rate at 2 per cent. Naturally then exporters will now have to pay up to 3.5 per cent markup on export loans.

The SBP circular issued by its Banking Policy Department did not give any reason for the increase. But obviously the export refinance rate has moved up in line with the recent increase in the average yield on six-month treasury bills that serves as a benchmark for fixing this rate.

The weighted average yield on six-month bills went up by 39 basis points to 2.08 per cent in the latest auction held last week. At end-July 2003 the average yield on six-month bills was 1.21 per cent that brought down the export refinance rate to 1.5 per cent in the following month and kept it unchanged for 10 long months.

The half a percentage point increase in export refinance rate is sure to hit exporters hard. Says Riaz Tata who heads Federation of Pakistan Chambers of Commerce & Industry: "The increase (in export refinance rate) is bound to have a negative impact on exports and impede its growth."

Mr Tata says businessmen do realize that the refinance rate has risen in response to the increase in T-bills rate. So there is no point in asking the SBP to revise it downwards.

"But the SBP can ask the banks to lower their spread from 1.5 per cent to 1 per cent," he suggested when reached by Dawn over telephone. This would offset the impact of half a percentage point rise in the export refinance rate and exporters would continue to get export financing at 3 per cent.

Mushtaq A Vohra, former vice chairman of All Pakistan Textile Mills Association, says that as cotton prices are at high levels "the increase in export refinance rate at this time will hit the exporters in two ways."

"Our financial cost will increase and we will not be able to compete in the world markets," he said when reached by Dawn over telephone. He also suggested that banks should cut their spread from 1.5 to 1 per cent to ensure that "exports continue to grow."

Senior bankers say it would be difficult for them to charge only 1 per cent spread over export refinance rate in pricing all export advances across the board. "Banks are already charging less than 1.5 per cent spread from good exporters on case-by-case basis," said head of credit division of a large local bank who refused to go on record. "It will be too much to ask banks to reduce the spread to one per cent across the board," he remarked.

Pakistan's exports grew by more than 13 per cent to $10 billion in July-April 2003-04 from $8.85 billion in a year-ago period. Low interest rates particularly cheaper export finance has been a a key factor behind this growth.