The decision of the State Bank of Pakistan, on 31st March, 2010, to raise the rate of refinance under the Export Finance Scheme (EFS) by 0.50 percent and for Long-Term Financing Facility (LTFF), by about 1.10 percent with effect from 1st April, appears to have been taken to satisfy a conditionality of the IMF under the existing Stand-by Arrangement.
According to the latest circular on the subject, the rate of refinance for EFS would now be 8 percent per annum, as compared to 7.5 percent previously and since the maximum margin/spread of the lending institutions cannot exceed 1 percent, exporters would now be eligible to borrow at 9.0 percent, instead of 8.5 percent prior to 1st April, 2010. The scheme for financing locally manufactured machinery would also attract a similar mark-up rate structure. The rates for participating in financial institutions (PFIs) and the end-users, under the LTFF, have also been revised upwards.
For loans upto three years, the SBP would provide financing at about 8.80 percent, the margin of the PFIs would be 1.50 percent and the end-users would have to pay mark-up at the rate of 10.30 percent per annum, as against the 9.20 percent previously. The interest rates for longer-term debt have also been increased on similar lines, though the extent of increase would depend on the length of period for which the credit facility is made available under the scheme.
An upward revision in the mark-up rates on EFS and LTFF by the State Bank would certainly attract a lot of flak by the business community, on the ground that the decision would adversely affect the level of exports of the country by making them more expensive in the international market. Also, the central bank of the country would be accused of bowing to the pressure of the IMF, which is now a favourite whipping boy of all and sundry. Criticism may also be levelled against the SBP's agreement to raise the mark-up rates for EFS and LTFF, in stages, to the level of the weighted average yield on six-month T-bills and yields of the same tenor for Pakistan Investment Bonds (PIBs) by end of September, 2011.
However, seen closely, although the business community and the exporters in particular, may cry foul, yet the decision of the SBP is not without economic merit. It needs to be pointed out that, contrary to the usual assertions of the business community, interest payments are generally a small part of the total cost of production and an increase of 0.5 percent for EFS and around 1 percent, under the LTFF, in the mark-up rates, are hardly going to make any difference, so far as competitiveness of our exports is concerned.
Adjustment in the exchange rate of the rupee, improvement in governance and law and order situation and overcoming of infrastructural bottlenecks, like ensuring of uninterrupted supply of electricity, are certainly much more important factors for raising the productivity of the economy and enhancing its export potential. Also, it needs to be noted that even after the present increase, the rates on EFS and LTFF would still be much less than the prevailing inflation rate and, therefore, these schemes would continue to be heavily subsidised. And, as is well-known, subsidy is always at the expense of some other sector of the economy or sections of the society.
Usually misconceived is the criticism directed at the IMF, which tries to dictate policy on merit and, contrary to the popular belief, has no axe of its own to grind in such matters. Arguably, consolidation of credit market should always be a desired goal because of the need to use scarce financial resources of the country in an optimal fashion. Subsidised credit leads to segmentation of the financial market and, therefore, should be avoided as far as possible. Also, the fact cannot be ignored that the seal of approval of the country's policy framework, by the IMF, gives confidence to foreign investors and other stakeholders that the management of the economy is on the right track and in accordance with sound principles.
That is probably why Moody's Investor Service has stated openly that Pakistan's credit rating is not likely to be downgraded despite a lot of problems facing the economy at the moment. All in all, we feel that the decision of the State Bank is in the long-term interests of the economy, though it may be perceived as a disfavour by certain sections of the business community.
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