Brace up, exporters!

Being spoonfed and depending on some form of external support has almost become an attribute of most of the Pakistani population. Exporters are no different.
The recent hike in Export Refinance Rate (ERR) to 9 percent by the SBP received great outcry and objections from the exporters fraternity, most of whom spoke vehemently against it.
Fawad Ijaz Khan, Chairman Pakistan Leather Garments Manufacturers and Exporters Association (PLGMEA), claimed that the increase in ERR will raise cost of production, and has urged the SBP to withdraw the increase.
The increase in the said rates has been pushed forth in wake of the requirement under the IMFs Stand-By Agreement to phase out export subsidies, given in the form of reduced borrowing rates under the Export Finance Scheme (EFS).
With delayed imposition of the RGST, approval of the sixth tranche of $1.3 billion from the IMF is already in jeopardy. The government clearly does not want to risk more by procrastinating on the increase in the ERR.
According to the IMFs third review of the stand-by agreement with Pakistan, "Continued recourse to these preferential refinancing windows at the SBP is estimated to result in quasi-fiscal costs amounting to 0.1-0.2 percent of GDP a year."
Contrary to exporters reaction to the ERR increase, bankers speaking to BR Research indicated that financing under the EFS has not witnessed a sizeable decrease.
"The trend in EFS credit demand has not shown any change and has been relatively stable over the past year or so, despite increases in EFS brought about earlier. This is possibly because the EFS rates are still lower than the KIBOR and hence still cheaper for the exporters," said a banker at one of the leading banks of the country.
Though the move may seem detrimental on a short-term, exporters whining does not appear very wise if examined on a larger scale.
The cry to Pakistani exporters to move towards value-added products and investment in more R&D to increase production facilities and hence upgrade products has fallen on deaf ears so far.
If exporters are fed by export subsidies on an ever-continuing basis, there will be minimal pressure on them to render their exportable products more competitive on factors other than price.
Further, the rupee has depreciated considerably, not only against the dollar, but also against the currencies of major trading competitors.
Where the PKR depreciated by 0.65 percent against the dollar in the last 3 months, the Bangladeshi Taka depreciated by 0.22 percent, and Indian Rupee and Chinese Yuan appreciated by 2.63 percent and 1.31 percent against the greenback respectively.
Though this is not a good sign for the countrys trade deficit, it nonetheless, offers some respite to exporters.
Hence the increase in ERR will provide some necessary push to exporters to upgrade their products from the low value-added range.
Given the hawkish stance of the SBP on the discount rate, combined with pressure from the IMF, the ERR is likely to be increased further over the coming months.
It is in the exporters interests to work on upgrading their product offerings and thus drive up profits rather than beating themselves up in urging the SBP to keep the rates subdued.