KARACHI, Nov 21: The State Bank has reduced the export finance rate from 12 to a maximum of 10 per cent for December 2001 and has announced to review the rate on monthly basis. Earlier the rate was being reviewed on quarterly basis.

The SBP said in a circular that banks would get refinance from the central bank at 8.5 per cent and add to it a maximum spread of 1.5 per cent while offering export financing to the borrowers. Thus, the effective interest rate that the exporters would have to pay in Dec under export finance scheme comes to 10 per cent.

The circular said next review of the export finance rate would be in January.

Earlier, the State Bank had linked the export finance rate to the weighted average yield of the six-monthly treasury bills in the preceding quarter on the insistence of the IMF that wanted elimination of subsidy on export financing.

It was under this arrangement that the State Bank had reduced the export finance rate from 13 to 12 per cent in October. As a matter of principle the next review of the rate was to be made in January. But “keeping in view the changing market conditions it has been felt necessary to review and adjust the rates...more frequently,” says an SBP press release. “It has now been decided that this would be done on monthly basis rather than on quarterly basis.”

Bankers say the SBP decision to review export finance rate on monthly basis would go a long way in retaining the rate market- based status of the rate. They say the treasury bills rate has fallen sharply after a massive 2 per cent cut in the discount rate on October 20 making it possible for the SBP to cut export finance rate to 10 per cent for December 2001. They say the export finance rate may drop further in January if the six-monthly T-bills rate show no major spike.

Businessmen had been demanding lowering of export finance rate for quite some time particularly after the State Bank cut its discount rate from 12 to 10 per cent on October 20. The position taken by them was that a high export finance rate had kept their cost of financial input up making it difficult for themselves to compete in the global markets. Their demand became more and more vocal after many foreign buyers suspended buying from Pakistan in the post-Sept 11 situation. Pakistan fears a loss of at least $1.4 billion in its projected export earning of $10.1 billion during this fiscal year mainly due to the situation that emerged after the Sept 11.

Exports declined by five per cent in value terms last month and exporters say a further decline may be seen in the coming months as foreign buyers are still reluctant to place new orders with Pakistani exporters. They say the cut in export finance rate would lower their cost of financial input but that alone is not sufficient to let the exports grow faster. They say the need of the hour is to launch an image building campaign by Pakistan that can clear doubts in the minds of foreign buyers regarding ability of Pakistani producers to deliver goods on time.