Increase in Export Finance

Promotion of exports has become one of the major policy objectives of Pakistan due to balance of payments difficulties and dwindling foreign exchange reserves of the country. In order to play a greater role in this effort, the State Bank of Pakistan on 19th August, 2008 decided to increase the amount of export finance under its Export Finance Scheme (EFS) to Rs 358 billion for eligible export products during FY09.
In order to ensure availability of adequate financing to the exporters under the EFS and to assist them in achieving the export target, the State Bank itself would allow limits of Rs 125 billion to the banks under the scheme for the current year which are 25 percent higher than the amount outstanding as on June, 2008.
As loans under the scheme are provided for 180 days, around Rs 250 billion would thus be provided during the whole year as refinance at the rate of 7.5 percent per annum. In addition, banks would also provide financing facilities to the exporters under the scheme from their own sources to the extent of 30 percent or an amount of Rs 108 billion at the same rate of 7.5 percent.
Commercial banks were brought on board for sharing this mechanism. In order to ensure timely availability of financing to exporters, State Bank has also advised the banks that in future, financing requests from exporters under EFS should not be turned down which, otherwise, are meeting the requirements of the scheme and lending criteria of the respective banks.
Further, the central bank would regularly monitor the behaviour of various banks to ensure optimal utilisation of limits and if a bank is unable to fully utilize its allocated limit, its unutilised limit would be allocated to other banks.
We feel that the State Bank has taken a timely initiative to play its part in enhancing the level of exports and narrow the widening gap in the external sector of the country. The increase in the amount of export finance and its provision at only 7.5 percent, which is substantially lower than the ongoing six-month Kibor (at present around 13.5 percent), is bound to provide much needed relief to the exporters.
It may be mentioned that in addition to the amount extended under EFS, the State Bank also provides refinance under its long-term financing scheme for export oriented projects at a mark-up of seven percent for a period of two to 7-1/2 years and for a period of 10 years at a concessional rate of mark-up under another Long Term Financing Facility to the exporters.
All these measures taken by the SBP are aimed at ensuring adequate supply of financing to the exporters to enable them to compete in the international market to boost exports of the country. However, whether the State Bank measures would enable the country to achieve the intended objective is difficult to affirm.
For a start, the real increase announced under the EFS is not as great as would look outwardly due to erosion of punching power of the rupee on account of inflation during FY09 and as a proportion to the projected increase in exports during 2008-09.
Secondly, adequate and timely provision of export credit is only a one out of many export incentives. For instance, proper adjustment in exchange rate is the most potent instrument of export promotion and overvaluation of the currency could thwart all other efforts of gaining international market access.
Adequate provision of energy to the exporters, quality control, proper law and order situation, modern infrastructure and cheap and educated labour force are some of the other pre-requisites which could contribute immensely to the export promotion efforts. No less important are the technology know-how and the needed investment for the purpose.
Obviously, if all these factors do not simultaneously get the required importance and attention of the authorities, the State Bank's efforts alone are not likely to yield the desired results. In fact, the provision of higher credit to the exporters could sometime make the task of monetary management more difficult for the central banks. Since money is the most fungible commodity, its allocation and use cannot be usually restricted to the sector for which it is intended.
If the enhanced amount of export finance is channelised to non-productive sectors by the business community by some dubious devices or by relending at higher rates because of comparatively very low lending rate, it could further ignite inflationary pressures in the economy and add to the worries of the State Bank.
Notwithstanding all these limitations, we feel that the State Bank has taken a right step which needs to be complemented by all the other concerned authorities to improve the fast deteriorating situation in the external sector.