KARACHI, Sept 14: The State Bank on Saturday cut the markup by 41 basis points on both pre-shipment and post-shipment export financing in foreign currency. This is the second rate-cut within six months: On March 15, the SBP had lowered the rate by 86 basis points to encourage exporters to avail of foreign currency export finance facility.

A SBP circular issued to all banks on Saturday announced that the central bank had reduced the markup on pre-shipment and post- shipment export financing in foreign currency to 4.57 per cent from 4.98 per cent.

The circular said the State Bank had also brought down to 4.07 per cent from 4.48 per cent the rate of markup in case of post- shipment financing where post-shipment insurance cover has been obtained by the exporter. The new markup rates would be effective from September 16.

The rate at which the central bank will reimburse to the banks the foreign currency funds used in export financing has also been lowered by 41 basis points — from 2.98 per cent to 2.57 per cent. It means that the banks will continue to earn a cool two per cent spread (4.57 minus 2.57 per cent) on their foreign currency export financing.

The State Bank launched foreign currency export finance scheme on March 28, 2001, with the financial help of the Asian Development Bank and announced the rates of markup for the first time on April 22, 2001. This is for the third time since then that the markup rates have been revised downwards. Senior bankers say that during this period the exporters have so far obtained $50-$100 million as export finance in foreign currency.

The foreign currency export finance facility was originally designed to help exporters buy domestic inputs and finance the import of inputs and raw materials. It was also meant to give small and medium-sized exporters an access to export financing.

The facility is a dollar-based window and is self-liquidating i.e. exporters can sell the dollars borrowed under this facility in the inter-bank market to raise rupee funds.

Senior bankers say the majority of exporters has been using this facility for the same purpose particularly after September 2001, when the rupee value started appreciating. The local unit has moved up by 7.5 per cent against the dollar during past one year on the back of increased home remittances and inflow of a number of external loans and grants.

Exporters sell foreign currency export finance at prevailing exchange rate to meet their requirements. This effectively means raising rupee funds at a much lower rate than the export finance available in rupees.

Currently rupee-denominated export finance is available at 8 per cent. Since the markup on foreign currency export finance has now fallen to a little more than 4.5 per cent the exporters will be generating rupee funds at a rate lower by 3.5 per cent than the rate of rupee-based export finance.

Now if the exchange rate remains stable in the coming months — the chances for which are bright — exporters will continue to get benefit of lower markup on foreign currency export finance.

But if the rupee depreciates the effective cost of foreign currency export finance would rise to the extent of the fall in the rupee value.

Senior bankers say many banks particularly the foreign ones have been offering foreign currency export finance at the rates even lower than those announced by the State Bank of Pakistan.

This has become possible for the banks as the cost of raising foreign currency deposits is very low. Bankers say they are paying only 1-1.5 percent return to their fresh foreign currency deposit holders.