Wajid for developing 'Export Credit Fund' on modern lines

Wajid Jawad, former chairman of the Export Promotion Bureau (currently Trade Development Authority of Pakistan) has proposed establishment of 'Export Credit Fund' on modern lines for sustaining exports and generating growth.

Commenting on the proposed abolition of five funds, including Export Credit Fund by the State Bank of Pakistan (SBP), Wajid said that instead of abolishing Export Credit Fund, the State Bank should develop it on modern lines to get maximum benefits from the scheme.

"I believe that in order to attract the domestic as well as foreign investment and to get a healthy growth in export sector, these kinds of supporting funds are necessary, otherwise no one will invest in textile sector," he added.

He said the reasons behind lack of success of these funds must have been examined and referred to experts.

"As I remember that during my tenure as Chairman EPB, I took the initiative of establishment of Export Credit Guarantee Scheme on the nod of the Ministry of Commerce and worked out the scheme in consultation with the SBP and established the fund with a half-hearted meager capital of Rs100 million. A director from Islamic Development Bank, Shamshad Nabi met me and expressed keen interest in IDB to participate if the government could raise the paid-up capital to Rs 1 billion," he maintained.

He said the importance of Export Credit Guarantee concept has become all the more significant and essential in view of the circumstances arising out of the COVID-19 pandemic which will result in a widespread disruption and closure of the value added industries engaged in export of made to order merchandise, particularly textile clothing, made-ups, leather products, engineering products, cutlery and sports goods etc.

The buyers of these goods have resorted to widespread cancelation of their orders invoking their right to suspend or cancel any delivery or orders if they use, or hindered or prevented from using clauses eg, "Act of God", "Circumstances Beyond Our Control" and are absolved of any direct or indirect damage or loss this may cause to exporter, he said and added that this includes orders in production and orders in transit.

Wajid Jawad said that cancelation of orders means they do not take any responsibility for the cost of goods, cost of materials procured for the orders or any other related components.

"This would result in huge losses to the industry without any recourse leaving them high and dry and result in erosion of their investment and default on their repayment of bank borrowings," he added.

He said that this kind of phenomenon has been often repeated in Pakistan's history which resulted in mass closure and sick industries. Dismemberment of Soviet Union in 1991, Britain's exit from European Exchange Mechanism in 1992 called Black Wednesday or Housing and Mortgage Crisis in 2008 resulting in huge bankruptcies world over. All these global upheavals have impacted our businesses adversely without any appreciation by government and banks, he maintained.

In light of the previous experiences, Wajid Jawad said that it will be in fitness of things that the government would take initiative of establishing Export Credit Guarantee Insure outfit with substantial capital and active participation of commercial banks by buying stakes to cover their lending and not only secure their lending to the vulnerable and riskier sectors and lend more with lesser risk and provide safety net to exporting industries and their workforce.

Further, the government could approach the World Bank, the Asian Development Bank, the Islamic Development Bank, European Bank and China's Credit Insurance Bank for capital contribution and participation and technical assistance plus technology. International re-insurance companies should also be engaged to spread risks, he added.

"We have examples of China, USA and India where Export Credit Insurance forms the essential component of export regime," Jawad said.

For example; the exporter (seller) procures insurance from SINOSURE and transfers its insurance benefits to a bank, which then grants financing to it. When an insured loss occurs, SINOSURE pays the indemnity payable to the exporter (seller) under the insurance policy directly to the financing bank in full in accordance with the Indemnity Transfer Agreement or Accounts Receivable Transfer Agreement. Even the financing bank can purchase policy to cover its lending to the exporter.

The ECGC Limited (Formerly Export Credit Guarantee Corporation of India Ltd) is a company wholly owned by the government of India based in Mumbai, Maharashtra. It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce.

Jawad said that export credit insurance is designed to protect exporters against payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

He said the Export-Import Bank of the United States (abbreviated as EXIM Bank) is the official export credit agency (ECA) of the United States federal government. Operating as a wholly owned federal government corporation, the bank assists in financing and facilitating US exports of goods and services, he added.

"Value-added exports have highest risks compared to other exporting commodities such as rice, wheat, sugar, yarn or coarse textile cloth. The clothing and such other products mainly produced as per buyer's specifications and in case of order cancellation or frustration, these products become worthless," he said and added that in this situation, institutions like Export Credit Insurance can provide security to exporters and banks.

Wajid Jawad said the export industry requires massive investment to set up export unit and when an industrialist is investing billions of rupees, definitely it seeks some protection to avoid losses and keep secure its investment.

"For increase in our export volume, I feel that for every additional one billion export an investment of half a billion is required which will sustain exports for at least 10 years. So to narrow the balance the balance of trade, the government and the SBP should keep this factor in mind while formulating a strategy for enhancing foreign exchange earnings," he maintained.