SBP's helping hand to exporters, borrowers

Central banks all over the world are using various kinds of instruments at their disposal to avoid recessionary tendencies and stimulate growth in their economies because of the spread of the devastating coronavirus and Pakistan is no exception. Realising that that Temporary Economic Refinance Facility (TERF) offered at a concessional rate on 17th March, 2020 was too little under the circumstances, the State Bank announced another relief package on 20th March to support exporters affected by the loss of demand due to the COVID-19 threat and avoid liquidity crisis in the export sector. It may be noted that the SBP already offers Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF) to banks worth Rs 660 billion for extending cheap credit lines to exporters. The latest announcement was largely meant to ease the conditions under these schemes. According to the latest circular, exporters availing the EFS could now export one-and-a-half times of the borrowed funds, down from two times as was previously the case. Time period to meet performance was also extended from end of June to 31st December, 2020. Exporters benefiting from EFS could now also ship their goods within 12 months of availing credit, from the previous half year time frame. To avail credit through LTFF, SBP has also reduced the eligibility condition of exporters to 40 percent or dollar 4 million of total sales from all the borrowings between January-September, 2020 from 50 percent or dollar 5 million. The SBP has allowed banks to enhance the time period for realisation of export proceeds from the existing requirement of 180 days to 270 days on case-by-case basis. Moreover, in order to facilitate importers, time period for import of goods into Pakistan against advance payment has been extended to 210 days from existing requirement of 120 days. The SBP has also ensured the exporters that it stands ready to take additional measures as the situation related to COVID-19 and its impact on the economy evolves.
There is absolutely no doubt that the new measures have been taken by the SBP because Pakistani exporters are facing a number of problems due to declining demand of their products in the international market and the difficulties in executing existing orders due to rapid spread of coronavirus in the global markets. These are also aimed to prevent liquidity problems from turning into solvency problems amongst exporters. The facilitation measures cover almost all aspects of export business and include relaxation in matching amounts under EFS, extension in time period to ship goods, relaxation in conditions for LTFF, realisation of export proceeds and extension in the time period for import of goods. In the case of relaxation in matching amount under EFS, exporters were previously required to export twice the amount of borrowed funds on daily average product basis. If this requirement was not fulfilled, penalties were imposed and the credit limit for the next year was also reduced. The reduction in the performance requirement from 2 to 11/2 times is meant to reduce penalties to encourage exports. Similarly, exporters availing the subsidised credit schemes were required to ship their goods within six months of availing credit under the EFS and penalties were imposed in case of failure. The period of six months has now been doubled to 12 months to help exporters in the execution of their orders and avoid penalties. Another major relaxation has been provided by instructing banks to enhance the time period for realisation of export proceeds from existing requirement of 180 days to 270 days where the delay is related to COVID-19. The extension in time would help exporters to provide extended item to their buyers in making payments due to the coronavirus pandemic. Such a concession was necessary because exporters were now receiving their proceeds after a great deal of delay and SBP was quite harsh on imposing this condition. Importers have also been given certain concessions. In order to facilitate them, SBP has extended the time period for import of goods into Pakistan against advance payment from existing requirement of 120 days to 210 days. This concession has been given due to large-scale disruption in imports due to productivity problems in the exporting countries. The severity of the problems faced by the exporters could be seen by the observations of Secretary General, Pakistan Textile Exporters Association (PTEA), who has said that cancellations of export orders are growing due to lockdowns in various European countries and textile exporters may have to lay off their employees, mainly daily-wage workers. More than 50 percent of ready-to-shipment export orders were delayed by importers in several countries. In our view, it was better for the monetary authority at the present juncture to take cognizant of the problems faced by exporters and announce a package of support policies to mitigate the problems faced by the export industry. The assurance by the SBP that it stands ready to help exporters will give them more confidence to execute their orders and earn the much-needed foreign exchange for their country. The proof of this assurance is a further cut of 150 basis points in the policy rate on 24th March, 2020 after reducing it by 75 basis points on March 17, 2020. However, there is no need to be panicky as the impact of a decline in exports could also be offset by further compression in imports due to low oil prices in the international market. In a subsequent move, the SBP has also instituted concessions to provide relief to borrowers and clients of banks by allowing deferment of repayment of principal amount of loan by one year that amounts to 4.7 trillion rupees, reduction in Capital Conservation Buffer (CCB) from 2.5 percent to 1.5 percent that would enable banks to lend an additional amount of 800 billion rupees and relaxation of regulatory criteria for restructuring and rescheduling of loans. These steps would undoubtedly address the difficulties of bank customers particularly borrowers who otherwise would be facing certain default resulting in a substantial increase in banks' non-performing loans (NPLs).