Decline in exports during the current fiscal year so far is one of the major areas of concern. In order to establish that the banking system was not responsible for such a trend, the State Bank on 5th December issued a statement saying that the export refinance was being offered at a rate of 6.5 percent, or 4 to 4.5 percent below six months' KIBOR, and the positive impact of this measure on the export sector during July-November, 2006 had been Rs 1.07 billion.
Overall, the State Bank released Rs 137.9 billion during the current year as against Rs 120 billion last year. Other incentives offered to the export sector include the debt swap option and the long-term finance scheme for export-oriented projects (LTF-EOP) and research and development support. Pursuant to the announcement of the debt-swap option under LTF-EOP. The SBP has provided finance of about Rs 13.86 billion through commercial banks to the value-added textile industry and the spinning sector.
In addition, the industry has availed of Rs 8.40 billion under the scheme for new projects. The State Bank statement also revealed that various offices of the SBP BSC had released Rs 8.8 billion and cleared about 79,000 cases since July, 2005 under the research and development support scheme. During July-October, 2006 alone, 20,170 cases involving Rs 2.7 billion were cleared. With all these incentives, the export sector, particularly the textile industry, was expected to rationalise its cost structure and increase exports but the expectations do not seem to have materialised.
By issuing this statement, the State Bank, in our view, has effectively refuted allegations that the central bank of the country was not lending a helping hand to enhance exports of the country, particularly textiles and other related products. It seems to have taken this unusual step of going public, against the backdrop of a negative growth in the exports of the textile sector and the growing criticism of the SBP for not easing its credit policy to accommodate the demands of the textile industry.
We feel that such a criticism of the State Bank was unwarranted. The present refinance rate for export sector is negative in real terms and highly subsidised. While asking for a further reduction in export refinance rate, the exporters deliberately fail to recognise that inflation in other countries is generally much lower than in Pakistan. Any further reduction in interest rate would only add to the distortions, lead to more segmentation of credit market and promote the misuse of credit. Such a measure will also be a backward step in the financial sector reform process.
In our view, there are other more potent reasons for the decline in exports which are needed to be looked into. The recent weakness in export growth is due mainly to increased competitive pressure from China, India and Bangladesh in textile and clothing items in the post-MFA regime. Increased competitive environment in the international market has obviously taken a toll of Pakistani exports.
Clearly, there is a need to provide greater support to exporters but provision of subsidies in any form including interest rate concessions carries significant economic costs in the long run. Therefore, as emphasised by the SBP in its annual report released on 2nd December, the policy thrust must be on reducing the cost of doing business, improving infrastructure including removing transportation bottlenecks, enhancing labour skills, strengthening managerial capacity, reducing unit labour costs and providing a reliable supply of energy at competitive price relative to regional countries.
Energy shortages could unfortunately become more acute in the near future, hurting the export sector further. Corrective policies and initiatives are needed to be taken from short-term as well as long-term perspectives to make the necessary improvements in all these areas. The energy sector, in particular, is crying for bold and imaginative measures at the earliest. Needless to say that the policy of free floating exchange rate also needs to be maintained to let the Pak rupee find its true value in the exchange market.