KARACHI, March 31: The State Bank has increased its export refinance rate by half a percentage point to 5 per cent for April 2005, which means that exporters will get export loans at a maximum 6.5 per cent markup from the banks. Banks are free to charge a 1.5 percentage point spread over export refinance rate while offering loans to exporters under the Export Refinance Scheme of the State Bank.
This is the sixth increase in export refinance rate since the start of new fiscal year in July 2004—and seventh since May 2004 when the SBP had first raised this rate after keeping it unchanged for ten months.
The SBP said in a circular issued to all banks on Thursday that the increase in export refinance rate—-from 4.5 per cent in March to 5 per cent in April-—will also be applicable on part of the Export Refinance scheme under which banks offer export loans to exporters based on their performance during the last tenure of export loans. Export loans are offered for six months. The central bank also said that the scheme for financing locally manufactured machinery would also attract 5 per cent refinance rate in April meaning that export financing for LMM would also be available at 6.5 per cent in April 2005.
Exporters have criticized fresh increase in export finance rate fearing that it would add up to the problems threatening growth of exports in Pakistan. “The central bank should de-link the export refinance rate with the treasury bills rate (to avoid sharper increases in the refinance rate in line with the increase in T-bills rate),” said Dr. Arshad Vohra, a former chairman of SITE Association of Industry. Mr Vohra is one of the many business leaders including the present chairman of SITE Association Dr. Mirza Ikhtiar Baig who have been demanding de-linking of export refinance ate with the T-bills rate for the said purpose.
On Wednesday, the central bank had raised the weighted average yield on six-month T-bills to 5.5pc. But it refrained from increasing export refinance rate to this very level, which would have pushed up the maximum markup on export financing to 7pc. The SBP raised the refinance rate by only half a percentage point instead of a full percentage point keeping in view that a sharp increase in the rate might send a disturbing signal to the exporters’ community.
The central bank had started fixing export refinance rate at par with the weighted average yield on six-month T-bills on the insistence of the IMF to withdraw interest rate subsidy from exporters.
That the central bank has been successful in achieving this objective is evident from the fact that at 6.5pc, export finance markup for April would not be far below the weighted average lending rate of the banking system — and it would be almost equal to six-month KIBOR or Karachi interbank offered rate. Six-month KIBOR closed at 6.78pc on Thursday (March 31) and it is expected to move in the range of 6.7-7.0pc in April. Weighted average lending rate of all the banks combined stood at 7.08pc at end-February 2005. More recent data are not available but indications are that in April this rate would be somewhere between 7.2-7.3pc.
Whereas business leaders make customary statements for withdrawal of an increase in export refinance rate or for de-linking it with the treasury bills rate, majority of exporters continue to ignore it. The reason is that export financing no more forms the bulk of the bank credit availed by exporters. Instead, it constitutes a small percentage of that. Out of Rs340bn worth of loans offered by the banks to the private sector between July 1, 2004 and March 12, 2005, export loans were worth a little less than Rs20 billion.
Besides, with the tightening of monetary policy by the State Bank since the start of this fiscal year, overall interest rates have been on the rise and exporters have begun to realise that in tighter interest rates scenario, keeping export refinance rate low is not possible for a central bank. State Bank is no exception. More importantly, as the rupee has remained weaker during this fiscal year, it has benefited exporters and the benefit through weaker rupee has more than offset the adverse impact of rising export finance rate on their business. During July-March 2004-05, the rupee has shed about 2.2 per cent value against the US dollar despite State Bank interventions in the market chiefly because of soaring trade deficit.
The deficit stood at $3.476bn during July-February 2004-05 as Pakistan’s exports totalled $8.849 billion and its imports shot up to $12.325 billion.