The statement by the State Bank Governor, Shamshad Akhtar that export refinance rate would not be brought down and would continue to remain linked to the Treasury Bills' rates needs to be welcomed by the serious policy analysts of the country.
In her keynote address at the first session of the Expo 2006 Investment Conference on "Pakistan - Export and Industrial Competitiveness, Issues and Outlook," jointly organised by the State Bank and Export Promotion Bureau on 31st March, 2006, she categorically declared that the country could not afford to subsidise its exports and face countervailing duties from the importing countries.
According to her, there was no reason that the industry could not perform under high interest rates as there had been a rise in interest rates globally. To emphasise the point, she said that she had come from an institution which had taught her discipline and she "will do only that much which suits Pakistan."
As for the future, the Governor assured the audience that the State Bank was following a tight monetary policy which would, with the passage of time, bring down the inflation as well as interest rates. Already, the interest rates had declined from about nine percent to 8 percent which was a positive sign.
The remarks of the Governor on export refinance rate, in our view, are very well-founded and are a clear indication that the State Bank would continue to follow the reform process in the financial sector, irrespective of the change at the top. It needs to be mentioned that the State Bank had been able to link the export refinance rate with the T-bills' rate after a great deal of effort and in the face of severe opposition from the exporter community.
This reformatory step was taken because of several factors. As the Governor has stated, there was a real threat of countervailing duties or other restrictive measures by the importing countries due to interest subsidy on Pakistani exports. On the domestic front, high interest rate subsidy on export finance was creating distortions in the economy. Country's financial resources were utilised in a sub-optimal fashion due to segmentation of the credit market, which resulted in lower productivity in other sectors of the economy and sluggish growth.
Also, if the export refinance rate is lowered, it may lead to reduction in deposit rates and undermine the saving rate of the economy further. Besides, it needs to be clearly understood that there are other more potent instruments of export expansion.
While exchange rate policy tops the list of these instruments in this respect, opening up of foreign markets through various devices and liberal import of machinery and industrial raw materials could also be of great help. Fortunately, the government of Pakistan is trying all these options vigorously and also getting the results in the form of higher exports.
It is time for the exporter community not to insist on reduction in export refinance rates and let the credit market integrate. The desire for crutches is not the sign of a healthy person or society.
Other observations of the Governor at the conference, though largely true, may not be so persuasive, however. Addressing the foreign investors, she said: "I would not expect you to come to Pakistan and work as philanthropists but to make profits, and for this the country ensures the highest rate of return in the entire region.
We need FDI in order to sustain our current high growth of 8.4 percent and you need good profit margins." Very convincing arguments but one needs not to be a Nobel Prize winner to know why Pakistan is so unattractive for foreign investors.
The heavy guard under which the guests are taken from the hotel to the Expo Centre in Gulshan-e-Iqbal is enough to scare them even if they don't care very much about corruption, inadequate infrastructure, labour problems etc in the country.
The Governor also explained that imports were growing by 40 percent, which was inflating current account deficit, "but it is not worrisome as long as we can afford it." Such statements only encourage the policy makers of the country to live beyond means and borrow more. We wish the government and the State Bank realised that it is better to reduce and contain the current account deficit at sustainable levels now rather than postpone the problem which may be difficult to control in future.