EXPORT FINANCING DEFYING MONETARY TIGHTENING

TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Mar 30 - Apr 05, 2009

While business community has been raising voice against rise in interest rate, saying that increases cost of lending and subsequently affects greatly on in particular exports from the country, Banking Services Corporation of State bank of Pakistan came to tone down the protest in a paper that contends working capital finance to exporters is generated mainly through the export finance scheme, which has special mark-up attached with it.

In a way, it sees no impact of policy rate fallout over exporting industry. BSC-SBP provides loans to selected exporters through export financing scheme, Islamic export refinance scheme, and long term financing facility against mark up lower than prevalent market rates and with special terms. While mark-up is linked to weighted average yield on 12 months treasury bills (12.98 percent in last auction) as well as PIBs of three and five years maturity, in case of EFS rate has been fixed at 7.5% since July 2006 at a rate below the appropriate benchmark, a BSC performance appraisal publication says.

GRANTS UNDER EXPORT FINANCING

Through commercial banks, these loans are extended to exporters and the subsidiary has fourteen field offices to build liaison between bank and participating financial institutions (PFI). The central bank data reveals that during fiscal year 2008, total number of grants under EFS was 25,691 as compared to 29,283 in FY07. Under Islamic export refinance scheme, the number of grants was 670 while under long term financing export-oriented project, which was replaced by LTFF in January 2008, it stood at 290. By end of FY08, total outstanding amount of loan under EFS was Rs99,372 million as compared to Rs133,629 million on FY07 end. Total financing volume under IERS stood at Rs5,234 million as against Rs5,906 million while under LTF-EOP Rs39,410 million was provisioned as opposed to Rs44,038 million.

Export finance scheme accounts for major disbursement of advances to export oriented industries in last fiscal year. Since loans are channelized through participating financial institutions, BSC refinances the loan amount and banks earn profit over spread in mark up-the difference in rate offered to PFI and end user. In past, central bank extended 100 percent financing, but now it reimburses only 70 percent of finance disbursed by banks for a maximum period of 180 days for direct export and 120 days for indirect export. Special repayment tenure of 270 days is for export of hand knotted carpets and exports to South America it was reported. Share in financing encourages commercial banks to participate fully in the financing programmes, according to the BSC.

INCORPORATION OF ADDITIONAL LENDING RATE BY BANKS

Even if fixing of lending rate would not make advances immune of monetary tightening, the mark up under incentivized financing stays at substantially lower level than prevailing market trends because of its linkage to weighted average yield on 12 months treasury bills. That keeps it from incorporation of additional lending rate by banks. Provision through banks does not imply ordinary mechanism of determining lending rate what happens at usual, for example, when KIBOR is used as a benchmark. On this account, EFS is suitable as typical interbank offer rate on March end was over 12 percent.

Export financing has biasness for industries and is out of access to non-value added export industries. It is not available for 21 commodities, which are in the negative list of EFS, including raw cotton, yarn, petroleum products, crude minerals, etc. However, direct exporters or input suppliers to direct exporters, small and medium exporters having $2.5 million annual exports, and trading companies are eligible to financing facilities.

Exporters who do not want to avail conventional mode of financing can apply to Islamic refinance scheme, which is offered through Shariah-compliance banking system. Besides, they can get credit to import machinery and equipment or modernization under long-term financing facility of up to 10 years. This financing facility has a maximum grace period of two years. During FY08, the three-year LTFF lending rate for end user was 8 percent and maximum it was 10 percent. KIBOR is 14.74 percent for three years financing as per the last update. The BSC paper said Rs8 billion was allocated for LTFF for two quarters of FY08.

KEEPING VIGILANCE ON FUNDS FLOW

With apparently limited numbers of field offices to verify export-financing cases and for inspection in PFI, keeping vigilance on funds misappropriation is not easy. Irregularities in financial system are common. There are reports of misuse of funds. Rightly or wrongly, export development fund is claimed in news reports to be misused. In fact, commerce minister Makhdoom Amin Fahim reportedly acknowledged misappropriation of EDF, built up because of levies of export development surcharge on exports, and aimed at to funding establishment of training institutions to enhance skills of workforce and their capacity building. Before the approval of export development fund bill 2005, which proposed an appropriation of funds equivalent to receipts of export development surcharge in the preceding year, ministry of finance transferred part of EDS to EDF. There was no provision of complete transference of surcharge in the export development fund Act, 1999.

Making it obligatory to provide export financing to qualified exporters is different from ensuring this. Unavailability of finance to genuine exporters is an obvious consequence of misuse of finance. Therefore, central bank should expand network of field officers and increase volume of loan to extend outreach of export financing.

Progress of export industry depends on nominally priced working capital and easy reach of exporters to finance. Government's help in this regard is essential.