KARACHI, Sept 30: Banks will charge 4.5 per cent maximum mark-up on export loans in October, as the State Bank has raised the rate of export refinancing by 50 basis points to 3 per cent.

Banks are allowed to keep a maximum spread of 1.5 per cent over refinance rate or the rate at which they get reimbursements from the central bank against their loans forwarded to exporters under the SBP's Export Finance Scheme.

A circular issued by the Banking Policy Department of the SBP on Thursday said that the rate of refinance for finances against locally manufactured machinery or LMM will also be 3 per cent for October, which means banks will finance LMM at 4.5 per cent next month.

In September, banks provided export loans to eligible exporters and financed LMM at 4 per cent as the rate of refinance against both types of financing was 2.5 per cent.

The central bank has raised the rate of export refinance by half a percentage point in relation to the increase in the weighted average-yield on six-monthly treasury bills that serves as benchmark for fixing this rate.

This is the third consecutive increase in export refinance rate since June 2004 when the central bank started raising it, after keeping it unchanged for 10 months, between August 2003 and May 2004. The SBP had to raise export refinance rate in response to the increase it had to allow in the weighted average yield on six-month treasury bills to contain inflation.

Till May 2004, exporters were getting export loans at a maximum rate of 3 per cent as the refinance rate was pegged at 1.5 per cent. But in four months to September 2004 they have seen the rate rising to 4 per cent and will now see it shooting up to 4.5 per cent next month.

This is bound to turn them panicky, particularly because the rate seems set to rise further throughout this fiscal year as the central bank will keep raising the T-bills rate to keep inflation in check.

Says Mr Riaz Ahmed Tata, the president of the Federation of Pakistan Chambers of Commerce & Industry: "Progressive increase in export finance rate will definitely have an adverse impact on exporters' competitiveness and, in turn, on export growth. The depreciation in the rupee value is going to compensate it to some extent but the pace of depreciation is too slow."

Mr Tata is among those in the business community who believe that the government and the central bank must come up with some new mechanism for determining export refinance rate. "This rate was aligned with the T-bills yield on the insistence of the IMF. Now that we are getting out of the IMF programme by the year-end, the government and the SBP should consider some relief for exporters (in terms of concessional export loans)."

"The cost of doing business in Pakistan is already higher than in other countries of the region. If export refinance rate keep rising, in response to likely increases in treasury bills rate, our exports competitiveness would be affected."

Mr Rahim Janoo, a former chairman of Rice Exporters Association of Pakistan, also said that keeping export refinance rate linked with the yield on six-monthly T-bills rate may continue to hit exports' growth as the SBP is set to raise T-bills rate progressively to contain inflation.

"The central bank must see to it what can be done under the present circumstances to ensure that export refinance rate does not rise to levels where it may start hurting the exports."

Mr Janoo, who is also a member of the Federal Export Board, said the 50bps increase in export finance rate in October would hit rice exporters in particular. "We seek big export financing in October-December, which is the ideal time for making bulk purchases of both Basmati and Irri-6 rice. The increase in export refinance will increase our financial cost and hit our exports."