High interest rates effectively reveal what economic growth looks like in a credit starved economy. During FY22, when Kibor averaged around 9.5 percent, the economy posted its highest GDP growth rate of 6.1 percent in 17 years (rebased 2015-16), and highest ever goods export of $32 billion. The very next year when Kibor averaged 17.5 percent, GDP growth slowed down to 0.3 percent, while goods exports slumped to $28 billion.

Rice exports have been no exception. It now appears certain that the industry will close the marketing year 2022-23 (Oct 22 – Sep 23) with lower banking credit outstanding than at the beginning of the marketing year, in nominal terms. In fact, with borrowing rates averaging at 20 percent during the period, year-on-year credit growth has turned negative for the first-time during Aug 2022, meaning the industry has net retired debt over the past 11 months. Little surprise then that the industry’s exports fell by $364 million during FY23, after posting record earnings of $2.5 billion during the previous year.

But there is more to the rice industry’s export performance during the now ended marketing year 2023 than mere business cycle. While it is correct that Pakistan’s rice exports fell by one-fourth (by volume) during the period, many would argue that this was primarily an outcome of monsoon floods 2022, which wiped out nearly 2 million metric tons of rice output. In contrast, rice exports fell by almost 1.3 MMT, suggesting that either an ever lower local consumption offset the production loss, or that the industry managed to offload carryover inventory from the prior year. Whatever the explanation, however, credit crunch alone should not explain weaker performance by the industry.

To examine this theory, look towards credit growth at the beginning of the marketing year. During the first quarter of the marketing year (Oct – Dec 2022), short term credit to rice processing industry grew at nearly the same rate as the prior year, rising by two-thirds between Sep and Dec 2022 end, which is when credit offtake by the industry usually peaks out. This means that despite higher interest rates, working capital financing by the industry rose at the same rate despite lower stock availability in the local market due to damage by floods.

But even as flood did little to subdue processor’s interest in grain procurement, it is the debt retirement (or loan settlement) during the year that truly picked pace. Consider that in past years, ST credit to the industry fell by around 20 percent between Dec peak and June end; in contrast, during the period under review, credit to rice processing industry fell by a massive one-third during the same six months. Meanwhile, while industry’s credit turnover rate rose, the same was not reflected in export performance.

Although earlier settlement of bank loans during the period of higher interest rates appears intuitive (to reduce the cost of debt servicing), it does not explain weaker export performance, which should have in fact lopsided higher exports during earlier months than under ordinary circumstances.

What is clear, however, is that the era of leveraged exports has truly bottomed out during the now ended marketing year. As the industry enters the new marketing season, interest rates are still near historic peaks, with no more concessionary finance windows available. Commodity prices are also above 10-year record peaks, which means leveraged inventory building is not going to come cheap for the industry, especially if the rice prices crash in case India lifts its export ban, leaving industry with significant inventory losses, and high rates of debt servicing.

But without access to cheap credit, will rice industry be able to post record exports? Or will the industry self finance its procurement, especially in light of the slow down in currency depreciation over the last 30 days. Pakistan may very well be expecting a rice bumper crop, but FY24 might still not prove to be a smooth sailing for the industry after all.