In a collaborative effort the State Bank of Pakistan, Ministry of Commerce and the Export Promotion Bureau have launched a new scheme for Long Term Financing for export-oriented projects last Tuesday.
Basically, this scheme is the culmination of the Trade Policy initiatives announced by the Minister for Commerce last July, based on the comprehensive export strategy that the EPB has been following since the year 2000.
The initiative is geared to meet the exporting community's capacity building needs and obtain increased production for export. While the Ministry of Commerce and EPB will provide financial and technical assistance to exporters, in a public-private partnership, on a 50:50 cost-sharing basis, the State Bank of Pakistan will provide adequate capital resources for new investments.
The salient feature of the scheme is that the State Bank will provide refinance to the commercial banks who will lend funds to the entrepreneurs for the import of plant, machinery and equipment with accessories, for expansion of the export industries, their modernisation and BMR requirements.
The existing Export Finance Scheme of the State Bank of Pakistan caters for the working capital needs of the export industries at a concessional rate of maximum 3% based on the State Bank refinance rate of 1.5% plus a maximum spread of 1.5% allowed to the commercial banks.
The new long term financing scheme fulfils the need of project finance, on a medium to long term basis, ranging from one year to 7 1/2 years. The mark-up rates are to be adjusted to the size and capacity of the enterprise.
The small and medium enterprises (SMEs) will be particularly looked after through a reservation of bank lending for them at least upto 50%.
In selecting projects for long term financing, the commercial banks are to give preference to the projects approved by EPB under various promotional schemes of the Trade Policy announced by the Ministry of Commerce.
The loans will be available for the import of only those machinery items which are not manufactured locally. The source of information for the determination of local manufacture has not been prescribed and explained, in the absence of which both the sponsors of the projects and the lending banks may face difficulties in striking deals.
Consequently, long delays may be involved in the import of the required machinery. At the same time, the customs may also dispute the veracity of a claim that the machinery is not produced locally.
In view of this, a clear cut procedure must be adopted for the determination whether a machine is or is not manufactured locally. In our opinion, the borrower's view in this respect must prevail as sometimes a locally produced machine does not provide the efficiency that is needed.
The entrepreneur will only be importing and paying extra if it gives him cost efficiency.
Under the new scheme, the projects/units which export atleast 50% of their annual production, directly or indirectly, will be eligible to get finance.
It is in the fitness of things that borrowers having overdue export bills of more than a year will not be entitled. Thus the scheme caters also for the indirect exporters ie those who provide goods and services to the direct exporters.
The scheme prescribes financing on the basis of 80:20 debt-equity ratio. The State Bank will allow refinance on service charge pattern, determined on the basis of weighted average yields of last two auctions of 12-month treasury bills or three years PIBs or 5 years PIBs where financing is availed of for two years, three years, five years and 7 1/2 years, respectively.
The State Bank will determine these rates on annual basis on 1st of March each year, but the rates of finance on the outstanding amounts once locked into will remain fixed for the entire period of financing provided the borrowers fulfil their obligations by payment of principal and mark-up on due dates.
This will make for great comfort to the exporters/borrowers who will be protected against mark-up rate escalations in the capital market.
Loan financing under this scheme will not be available for projects in the spinning and weaving sectors of the textile industry. But it may be pointed out here that the textile weaving sector in the country consists of mainly power looms in the unorganised sector, and, as such, the weaving industry does need accommodation for up-gradation and extensive modernisation for the production of superior quality fabrics which can also be exported as highly value-added textile products. At present fabrics manufacturing in Pakistan is largely confined to gray cloth for export as also for converting the same into dyed and printed cloth for the local market.
Thus the manufacture of fabrics in Pakistan is conspicuous for not trying to manufacture highly value-added products. While there is some logic in the assertion that garment makers abroad compete with Pakistani exporters using Pakistani fabric, this disadvantage can be corrected by imposing an export price check.
The price of fabric exported must be higher than the sale price within the country.
The SBP reason for keeping the textile makers out may be the extraordinary increase in bank credit to this sector on account of low interest rates. But with rates showing an upward trend, they would need to be included in the financing scheme, if the plan for establishing textile cities in Karachi and Lahore is to materialise.
Ignoring the textile sector which provides a clear competitive advantage in world market to this country is a wrong policy. We know that a lot of people consider spinners as a pampered class but we need dollars to meet our import needs and it is the textile sector which accounts for over 60 percent of our exchange earnings.
Interestingly, the scheme allows funding for acquisition of brand name/franchise with repayment within five years. The only local industry which can avail of the facility in all fairness, appears to be half a dozen or more big integrated textile groups.
Moreover, the repayment period of two years described as "long term" appears to be a misnomer, because a two-year period is definitely a short term in industrial banking. The minimum period of repayment should be three years.
The availability of timely liquidity to an exporter is more important than the cost ie rate of interest.
He requires help in getting stable supply of water and electricity, good roads and transport to have his labour come on time and for his goods to reach the port.
We refer to these factors to caution that it is not just the responsibility of EPB, SBP and the Ministry of Commerce to facilitate exports. The Central Board of Revenue (CBR), provincial authorities such as; the Labour Department also need to be more responsive.
The Government needs to sort out the duty drawback issue, sales tax refund delays and restrict the applicability of Industrial Relations Ordinance to units having a work-force of atleast hundred hands. Then only can we blame the lack of entrepreneurship among Pakistani exporters.