The government has finalised the revised re-lending policy, according to which re-lending interest rate would be fixed at 12 percent against 17 percent per annum, official sources told Business Recorder. The Economic Affairs Division (EAD) had submitted a proposal for "revision of re-lending policy of foreign loans/credits", approved by the Advisor to PM on Finance on December 31, 2008 for consideration of the ECC.
The ECC considered the summary in its meeting on January 13, 2009 and directed that State Bank of Pakistan (SBP) Governor and Economic Affairs Division revisit all options and resubmit their recommendations to the ECC. Sources said that a meeting was held between the SBP and Economic Affairs Division (EAD) Secretary on January 28, 2009.
The proposed formula for determining the re-lending rate should be revised in order to reflect proper exchange risk cover (ERC). Old and Revised Formulae are as under:
OLD GOP's average foreign borrowing cost [of last 28 years] + ERC [weighted average yield of PIBs for 15, 20 & 30 years - US Treasury Rates] + Administrative charges] ie 4.5 percent + (14.7 percent - 3.0 percent) + 0.75 percent = 16.95 percent, or 17 percent.
REVISED GOP's average foreign borrowing cost [of last 28 years] + ERC [5 years moving weighted average yield of PIBs for 15, 20 & 30 years- US Treasury Rates] + Administrative charges] ie 4.5 percent + (11.56 percent - 4.74 percent) + 0.75 percent = 12.07 percent, or 12 percent.
Sources said that for the default cases of recovery of re-lent loans, a clause of late fee charges on the due instalment [principal + interest] at the rate of 1 percent during the first year of default, 2 percent during 2nd year of default, 3 percent during the 3rd year of default, will be included in the agreements.
The current re-lending policy, approved by the ECC, was circulated among the stakeholders (i) provincial governments/departments on the same terms and conditions at which they were borrowed by the Government of Pakistan (GoP). There is no ERC in such cases; (ii) federal government entities (like NLC, CAA), maintaining commercial accounts, at 12 percent pa [5.2 percent interest rate + 6.8 percent ERC]; (iii) DFIs at 12 percent pa (5.2 percent interest rate + 6.8 percent ERC).
The DFIs are allowed to charge maximum spread of 3 percent pa from the final borrowers as their administrative charges over the rate of 12 percent pa; (iv) autonomous bodies and corporations at 15 percent pa [8.2 percent interest rate [5.2 percent + 3 percent spread allowed to DFIs] + 6.8 percent ERC.
The revised re-lending rate works out to 12 percent pa according to the revised formula compared with 17 percent pa with the old formula of the Summary submitted on 31-12-2008, and 14 percent pa approved by the ECC in 1997. The summary has been revised and updated in the light of decisions reached between SBP and EAD.
It is therefore proposed that the foreign loans/credits may be re-lent to Provincial governments/departments on the same terms and conditions at which loans will be borrowed by the GoP. The ERC will be the responsibility of the provinces; i. Federal government entities (like NLC, CAA), maintaining commercial accounts, at 12 percent pa [5.2 percent interest rate + 6.8 percent ERC];
ii. The DFIs at 12 percent pa (5.2 percent interest rate + 6.8 percent ERC). The DFIs may, however, charge maximum spread of 3 percent pa from the final borrowers as their administrative charges over the rate of 12 percent pa;
iii. Autonomous bodies & corporations at 15 percent pa [8.2 percent interest rate [5.2 percent + 3 percent spread allowed to DFIs] + 6.8 percent ERC];
iv. For giving equal treatment to ultimate borrowers, the repayment period will be equal for all the four categories and will be the actual redemption period available to the GoP; and
v. For the default cases of recovery of re-lent loans, late fee charges will be levied on the due instalment [principal + interest] at the rate of 1 percent during the first year of default, 2 percent during 2nd year of default, 3 percent during the 3rd year of the default and---.
Sources said that this proposal would be considered by the ECC on Tuesday, as all other guidelines, terms and conditions as approved earlier by the ECC would remain the same. However, re-lending policy will be reviewed on yearly basis to give true effect of the five years moving weighted average yield of the PIBs and US Treasury rates with reference to the agreed formula for determining the re-lending rate.
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