There have been consistent demands for a reduction in export finance rate from the business community after the latest cut in the policy rate by the State Bank of Pakistan. On 4th September, 2012, exporters again urged upon the government to lower the export finance rate in accordance with a 150 basis points cut in discount rate last month in order to boost exports. Other business leaders said that the SBP slashed its discount rate in August but did not make any move on the export finance rate which continues to stand at 10 percent plus one percent.
Chairman, Pakistan Towel Manufacturers Association (TMA), Feroze Alam Lari contended that the discount rate currently stands at 10.5 percent which is almost equal to the export finance rate and, as such, there is no benefit in getting export finance facility from the banks. Naqi Bari, Vice Chairman, Pakistan Bedwear Exporters Association (PBEA) asserted that export finance rate - fixed through circular No 17 of 2010 at 10 percent - continues to remain unchanged at this level despite a downward adjustment of 350 basis points in the policy rate since then. According to him, there's no way to arrest the rapidly falling exports except to reduce the finance rate by about 3.5 percent to give an edge to export trade. Bari also demanded that export finance rate for textile exports should be brought down to 5 percent as had been committed by the government in its Textile Policy 2009-14.
The demand of the business community for a substantial cut in the refinance rate, especially for exports, could be evaluated from several angles. It could be easily demonstrated, from purely economic point of view, that segmentation of credit market leads to sub-optimal utilisation of financial resources of an economy and, therefore, consolidation of credit market, ie, non-intervention by the monetary authority in the distribution of credit and its pricing and letting the boards of banks to decide such matters, was a preferred policy option.
Such a strategy would induce banks to disburse credit to sectors/businesses where it would be most productive. That is why multilateral financial institutions such as the IMF are opposed to subsidised credit. These institutions want the discontinuation of such a policy whenever a country negotiates a programme with them. It, however, needs to be stressed that such an open policy is not supposed to distinguish between the sectoral, regional, and social priorities of a country so far as allocation of credit is concerned.
As is clearly evident, there is a merit in consolidating the credit market but a number of countries do not follow such a policy, probably under the influence of certain business lobbies or due to an honest conviction that policy goals of a country could be better achieved by channelising the flow of credit to the priority sectors as determined by the relevant authorities. Pakistan has usually deviated between the two extremes by directing a certain level of credit into priority areas and reducing its rate through the refinance facility of SBP and allowing the rest of credit disbursement to be managed by the banks themselves through their own processes and without discrimination between the sectors. While the benefits of such a policy on the overall economy still need to be analysed in-depth, the beneficiaries of the present credit regime getting credit facilities at lower than the market rate through the refinance window of the State Bank would obviously continue to insist on reducing the interest rates on facilities availed by them, especially when the SBP eases its monetary policy stance.
We feel that the present demand by exporters to reduce the rate on export finance is vindicated not only by a substantial cut in the policy rate but by the urgent need of the country to bolster the level of its exports by a considerable margin to support its balance of payment (BoP) position and avoid insolvency. Hopefully, the SBP would consider the case of exporters for lowering the export finance rate sympathetically and make the necessary downward adjustment. However, it needs to be pointed out that reducing the export finance rate by few percentage points would not make much difference to the level of exports because the overall productivity of the economy plays a more crucial role in determining the level of exports rather than some adjustment in the rate on advances which could only make a marginal difference in the cost of production. We feel sad to say that no measures are in place or being seriously contemplated by the policymakers at this point in time to raise country's growth rate or productivity which could prove as a panacea for most of the ills of the economy.
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