KARACHI, Jan 24: Banks may offer export loans at 5.5 per cent in February down from six per cent in January as the State Bank seems ready to lower export refinance rate by half a percentage point to four per cent.

Sources close to SBP say the central bank make another cut in export refinance rate to keep it aligned with declining yield on treasury bills. The SBP fixes monthly export refinance rate at a rate equal or closer to the weighted average yield on six-month bills in the preceding month.

The sources say since the weighted average yield on six-month bills fell to 3.84 per cent in January SBP will most likely fix the export refinance rate at 4 per cent.

This will enable banks to offer export finance at 5.5 per cent after charging 1.5 per cent spread on export refinance rate which is the rate at which they get reimbursement for export loaning from the central bank.

In February last year, the export refinance rate stood at seven per cent and the banks were offering export loans at 8.5 per cent. The possible lowering of export finance rate at four per cent and the consequent fixation of export loan rate at 5.5 per cent will, thus, make export finance cheaper by three percentage points in a year.

Cheaper export finance has been a key factor in keeping giving boost to exports not only in the last fiscal year but also in the first half of this year. In July/December 2002, Pakistan’s exports rose to about $5.2 billion raising hopes of meeting the full-year target of $10.4 billion.

The SBP had first linked the export refinance rate to weighted average yield on six-month treasury bills in April 2001 on the insistence of the IMF. The IMF had asked for phasing out interest rate subsidy from exports. The Fund had not only demanded that the export refinance rate be linked with the yield on T-bills it had also desired that the banks should be free to set their own rate for export loaning.

Bankers say since there is still a cap of 1.5 per cent on the spread they can charge on export refinance the export financing is not fully market-based. “It will become market-oriented only if this cap is lifted and we are allowed to charge spread on our own,” said a local banker.

But he admitted that lately exporters have become reluctant to avail of export financing in rupees as the banks have started offering them export loans in foreign currency. That works out to be much cheaper for the exporters—something around three per cent or even less than that as the banks are charging upto 1.5 per cent over six-month LIBOR.

“But banks are too choosy in offering foreign currency loans,” laments a former vice chairman of All Pakistan Textile Mills Association Mushtaq A. Vohra. “The financing is LC-based and the banks just do not entertain all customers.”