EDITORIAL: The Export-Import (Exim) Bank of Pakistan will finally be operational. It was one of the conditions of the IMF (International Monetary Fund) to establish this institution that would support international trade and help businesses explore new markets and products.
Here in Pakistan, at this juncture, the question is about the concessionary finance (mainly to exporters) which historically had been under the ambit of State Bank of Pakistan (SBP), and is now officially being shifted to the ministry of finance in a staged manner. From now onwards, SBP’s concessionary finance (mainly EFS – export finance scheme) will slowly shift to Islamabad. In the first years, 10 percent (around Rs77 billion) of EFS will move from SBP to Exim Bank, and by fifth year, an overall sum of Rs770 billion would be out of the SBP’s domain.
Right now the EFS essentially involves money creation where SBP is providing the amount to banks at lower rates, and they extend these loans to exporters after charging a mediation margin. Once the portfolio is out of SBP, the responsibility of banks would be to provide the liquidity and government of Pakistan to provide subsidy, if any. And given the fiscal conditions today, it’s likely that EFS will reduce by the amount being shifted to Exim Bank, till the time the government has some fiscal space to provide concession.
EXIM Bank of Pakistan: a major milestone
The implication of this shift would shrink money supply that would reduce concessions to exporters. In the past, SBP’s concessionary credit had attracted criticism for eroding the impact of tight monetary policy, as not long ago EFS used to be at very low rates (around 3%) and similar was the case of long-term funding schemes like LTFF and TERF. Currently, 16 percent of the working capital is provided by EFS and 20 percent of long-term loans by LTFF and TERF combined; and overall, 17 percent of private credit on these three SBP’s concession schemes.
Thus, these lower rates had in the past limited the ability to tighten the credit noose through the increase in the policy rate. However, now the EFS is merely provided at 3 percent lower than the policy rate and, consequently, effective subsidy has shrunk significantly. And there is almost no new long-term loan being provided on concession.
Thus, shifting EFS and other concessions to EXIM Bank would have a limited impact on monetary policy as well as on SBP’s profits. Since the concessions are new money creation by SBP, any notion in erosion of SBP profits would be invalid. However, there won’t be any new money creation, and the banks would have to provide liquidity on their own. Yes, theoretically, banks can go to SBP’s discount window for liquidity and that potentially can increase SBP’s profits.
However, with no fiscal subsidy, that might not happen, and anyways, SBP is already injecting Rs9 trillion liquidity through its Open Market Operations (OMOs) – a few billions are therefore neither here nor there. Thus, the concessionary finance to exporters will slowly taper off, and that is perhaps would also be the case for other subsidies – mainly in energy costs. Be that as it may, the facilitation and credit insurance providing role of Exim Bank is indeed extremely important, and that is perhaps the core function of any Exim bank.
These functions include providing credit insurance to exporters in exploring new segments and new markets, and to have better competitiveness in existing markets. It can facilitate import contract (instead of L/Cs) to attract buyers towards Pakistan. Others (such as India) are doing it, as they have had a fully functioning Exim bank for decades. Now the country can have a level playing field by having credit insurance through EXIM Bank of Pakistan.
The Exim Bank would also facilitate in getting surety bonds at lower cash margins, and that to help Pakistan-based construction companies to operate and compete in other destinations. For example, Pakistani companies can team up with top constructions companies in Turkiye and bid for projects in third destinations. Another exciting area is green climate funding for building capacity of exporters on cleaner production methods.
Here multilaterals could provide funding for exporters through Exim Bank. Already, IFIs like the Asian Development Bank and Islamic Development Bank are providing funding for developing global value chains, and EXIM Bank can facilitate those to our exporters and importers to become part of Global Value Chains (GVCs). There are lots of opportunities and functions for EXIM Bank beyond plain vanilla credit facility to exporters. The bank was formed during the COVID period and was moving at snail’s pace. Credit goes to caretaker Finance Minister Dr Shamshad Akhtar for taking keen interest that has resulted in its operationalisation.
The first challenge is to get international reinsurance, as without it, the EXIM Bank cannot scale up. The impediment was outdated PPRA (public procurement regulatory authority) rules that cannot be applied in a sophisticated credit insurance market. These are to be dealt with under the new SOEs (state-owned enterprises) law, and once a reputable reinsurer is on board, the EXIM Bank can kick-start. The bank is for long term play, and let’s hope it’s a start of fresh and new season in Pakistan’s trade, which is lagging behind others’ in the region.
Copyright Business Recorder, 2023
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