Export-oriented industrial development: SBP to provide additional concessional financing

In order to promote export oriented industrial development, the State Bank of Pakistan (SBP) has announced that it would provide additional concessional financing of Rs.200 billion - Rs. 100 billion under Long Term Financing Facility (LTFF) and Rs. 100 billion under Export Refinance Scheme (EFS) - to be utilized by 30th June 2020.

Further, to accommodate enhanced financing requirements of exporters for setting up long-term export-oriented projects, maximum financing limit under LTFF has been increased by 100 percent from Rs. 2.5 billion to Rs. 5 billion per project. In addition, SBP has also extended the scope of LTFF to cover all permissible export-oriented sectors.

SBP's this step is aimed at setting up of diverse export-oriented projects in Pakistan and to boost exports in multiple sectors and create new job opportunities. Loans under SBP's export finance scheme and long-term financing facility for exporters increased by 20.6 percent and 13.2 percent during 1st Jul-17th Jan FY20, supporting the recent growth in exports.

Addressing a press conference on monetary policy on Tuesday at SBP head office, Governor SBP Dr. Reza Baqir also announced some measures for promotion of exports and industrialization to earn more foreign exchange.

He said that SBP is supporting export sector as it wants to build up foreign exchange reserves with support of export proceeds. Therefore, limits of both export-related concessional schemes have been increased by Rs 200 billion to support industrialization in the country. Some incentives for small exporters will be announced in the next few days, he said.

SBP, in consultation with the relevant stakeholders, is in the process of devising an elaborate mechanism for the allocation of LTFF and EFS to SME exporters. These changes are likely to be announced in March, 2020.

Furthermore, with a view to facilitating importers, SBP has allowed banks to make advance payment of up to USD 10,000/-, or equivalent thereof, per invoice on behalf of commercial importers for import of raw material, spare parts and machinery. Besides, SBP has also allowed banks to make payments on behalf of commercial importers for import of raw materials and spare parts on Open Account.

In addition, SBP has also enhanced the existing limit of 50 percent to 100 percent advance payment for manufacturing concerns, for import of plants, machinery, spare-parts and raw materials etc. against letter of credit.

In December 2019, SBP allowed advance payment of up to 50 percent of the value of imports against letter of credit to manufacturing concerns for import of plant, machinery, spare parts and raw material etc.

Governor SBP said that after the implementation of a market based exchange rate system, the balance of payments has witnessed a significant improvement. In the first six months of the current fiscal year, the current account deficit contracted by 75 percent to US$ 2.15 billion.

This improvement is helping to further relax some of the restrictions on imports by SBP. The latest measures, taken on Tuesday, are in continuation of facilitating export-oriented industries and manufacturing concerns in the backdrop of ease of doing business and promoting exports' growth. These measures will further contribute in improving economic outlook of the country.

Replying to a question, the Governor SBP said that the removal from FATF grey list is the domain of FATF, "however, as per our assessment overall Pakistan has made significant progress".

Importantly, export volumes of major items including rice, value-added textiles, leather products, and fish and meat, exhibited a notable increase during Jul-Dec FY20. This reflects the benefits of a more competitive exchange rate and take-up of incentive credit schemes for export-oriented sectors. The capital account also continued to strengthen, with continued inflows of foreign portfolio investment and foreign direct investment.

These favorable developments facilitated the SBP to build up its foreign exchange reserves despite making a repayment of one billion dollar international Sukuk in early December 2019. SBP's foreign reserves increased from $ 7.28 billion at end-June 2019 to $ 11.73 billion as of 17th January 2020, an increase of $ 4.45 billion and SBP's short liabilities fell by $ 3.82 billion in the first six months of FY20.

These developments have significantly improved the SBP's net international reserves (NIR) position. It may be mentioned here that during the last fiscal year, the per project limit under LTFF/ Islamic LTFF was increased from Rs 1.5 billion to Rs 2.5 billion. At end June 2019, outstanding finance under LTFF/ ILTFF increased by 38 percent on YoY basis from Rs 114 billion to Rs 157 billion.