AN EXPORT-IMPORT BANK FOR PAKISTAN
By MUHAMMAD BASHIR CHAUDHRY
Aug 19 - 25, 2002
The Federal Minister for Commerce, Industries and Production, on 22nd July while announcing the Trade Policy 2002-03, said that the Cabinet had authorized preparation of a feasibility report for an EXIM Bank. He added that a committee headed by the Governor State Bank of Pakistan and consisting of the Secretaries Finance and Commerce has been set up. Committee will submit its report to the Cabinet by March 2003. Before making the above announcement, he referred to the launching on 16th July 2001 of the Pakistan Export Finance Guarantee Agency and activating in November 2001 of the Foreign Currency Export Finance Scheme. He said according to the feedback received by him, there had been only limited gains from these instruments. He proposed to build on the experience gained and refine these instruments further. He also proposed to work on a viable exchange rate cover, or an exchange insurance scheme, to maximize use of lower cost dollar denominated export finance.
On 23rd June 2002, it was reported in the press that a specialised financial institution such as the Export-Import Bank, generally called as EXIM Bank all over the world, might be set up for providing long-term project financing and to support the exports of the country. A draft SBP paper "Future Strategic Direction" circulated reportedly among top bankers proposed that the EXIM Bank would be established with the public and private participation in equity to be run by highly professional management. The constitution of the Committee, as announced the Trade Policy, under the SBP Governor for preparation of feasibility report is the right approach. In order to assist the Committee, this paper attempts to discuss main relevant factors for justification of another bank in the country.
Basic function of an export credit agency (ECA) or an export-import bank is to provide export finance — either directly or, more commonly, by guarantee or insurance of privately financed transactions. ECAs promote exports and increase competitiveness of domestic producers. ECAs generally provide guarantees or insurance for both the political and the commercial risks involved in export financing. Export credits may be extended by export-import banks, private commercial banks, or by the exporter in the form of supplier or buyer credits. However, export credits to developing countries are often guaranteed or insured usually by an ECA in the supplier's country. In countries where their exporters have the greatest business interest, ECAs pursue opportunities for the financing of equipment purchases by large state enterprises. There is increasing scope for ECAs participation in private projects, with stronger emphasis on project finance. There are multilateral ECAs sponsored by institutions like the World Bank and large number of official ECAs promoted by the respective governments of different countries. In addition there are a small number of private export credit insurers, but they are an exception.
The proposed EXIM Bank is expected to mainly facilitate and finance international trade of Pakistan. The bank may provide insurance cover or guarantee the loans availed by the borrower for financing the goods to be exported or advance its own funds as loan in certain special cases. In addition, the bank may facilitate and participate in limited recourse project finance by way of loan or a guarantee or both. Financing of services pertaining to engineering, construction, advisory may also be a part of the bank function. The list of functions would be finally decided in the light of many other factors that have a bearing on the rationale of such a bank. Some of these factors are discussed below.
Total trade volume of Pakistan is currently projected around $ 21 billion (imports $11.1 billion and exports $ 9.4 billion in 2002-03). Last year the imports were $10.335 billion and exports at $9.1 billion. In order to decide on a proposed EXIM bank; we need to carefully review the concentration, composition and direction of trade now as well as for the next few years. The situation of exports is taken up first:
1. After stagnating at around $8 billion during second half of 1990s, Pakistan's exports in 2000-01 stood at $9.202 billion or 15.7% of GDP. Despite difficult situation after the tragic events of September 11 and their aftermath, Pakistan's exports are highly concentrated in few items/groups namely, cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports, on average, accounted for about 83 % of total exports in the 1990s. Among these categories, cotton group alone contributed on average over 60%. During 2000-01, the concentration of these items was 80.9% of total. Such a high degree of exports in few items is major source of instability in export earnings.
2. The composition of Pakistan's exports has changes significantly over the decade of the 1990s. The shares of primary and semi-manufactured exports have declined with increase in the share of manufactured exports. During 2000-01, the share of primary commodities, semi- manufactures and manufactured goods was at 13 %, 15% and 72 % respectively. However, Pakistan still relies heavily on the labour intensive and low value added exports.
3. The United States, the European Union and Japan are the major markets for Pakistan's exports. Pakistan is trading with large number of countries but its exports are concentrated in a few countries. Slightly above one-half of Pakistan's exports during the 1990s went to seven countries namely, USA, Germany, Japan, UK, Hong long, Dubai and Saudi Arabia. By and large the same trend is continuing at present.
Pakistani imports are also peculiar, reflective of the country's development stage and resource endowment. Relevant aspects of imports are described below:
1. Pakistan's imports are highly concentrated in few items namely, machinery, petroleum & petroleum products, chemicals, transport equipment, edible oil, iron & steel, fertilizer and tea. These eight categories, accounted for about 75.5 of total imports in the 1990s. During 2000-01, the eight categories accounted for nearly 84% of total imports.
2. As regards the composition of Pakistan's imports, the share of raw materials for consumer goods in the total imports continued to be higher throughout the 1990s — rising from 38% in 1991-92 to 55 % in 2000-01. On the other hand, the share of raw material for capital goods was minimum and stagnated at around 6%. The share of capital goods exhibited a declining trend and came down to 25 % in 2000-01 from 42 % in 1991-92 — mostly because of slow down of investment in the country. The share of consumer goods averaged at 15 %.
3. Almost one-half of Pakistan's imports during the 1990s originated from seven countries namely, USA, Japan, Kuwait, Saudi Arabia, Germany, UK and Malaysia. By and large, relative shares of imports originating from these countries have remained almost the same. The share of USA, Japan and Germany exhibited declining trend because of the declining share of capital goods in total imports. On the other hand, the share of Pakistan's imports from Kuwait and Saudi Arabia depicted a rising trend because of the growing share of POL products in total import bill. Import share of Malaysia exhibited mixed trend in the 1990s, mainly on account of fluctuation in palm oil prices.
Our overall international trade volume is expected to experience fast increase in future. The concentration, composition and direction of exports and imports however would change with the time as well as the technological developments. Moreover, major changes are expected as a result of full implementation of WTO arrangements in the next few years in Pakistan and elsewhere. This may particularly affect the comparative advantage of a number of our exportable products due to changes in import duties regime and other factors. Probably at that time more assistance would be required from the EXIM Bank to help gear up the domestic industry to face global competition and for enhancing their export capabilities.
New Trade Policy has generated mixed reactions from FPCCI, industry and export bodies. The Policy has been criticized for non-resolution of chronic issues that hamper exports or act as irritants for the exporters. These include gradual phasing out of duty drawback; imposition of Sales Tax on exporters without registering the suppliers and the traders; burdening exporters with lengthy formalities so long delays in full rebates forcing exporters into liquidity crunch; imposition of 5% import duty on machinery; continued restriction on import of second-hand boilers; and lack of Afghan specific incentives. They have also complained the abnormal escalation in the cost of production of exportable goods by rising prices of inputs like electricity, gas, petroleum; and overheads like packing material and freight rates rendering Pakistani exports uncompetitive. However, there have been no complaints about lack of finance for import or export trade.
These exporters, however, were appreciative of the positive approach of the Finance Minister, the Commerce Ministers and the Governor State Bank. Policy steps that have been appreciated include 25 % freight subsidy on new products and on new markets; recovery of the EDS at the time of realization of export proceeds instead of upfront at exportation time; doing away of the compulsory registration of exporters or importers with EPB; allowing of free export of petroleum products; exempting SMEs and those units that increase their exports by 10 %; declaration of Gawadar as a Free Trade Zone; and allowing duty draw back on raw material imported indirectly. However, there have been no comments on the proposed EXIM Bank and it's filling an existing gap in the trade finance or the private sector participating with the government in it's capitalization and operation.
Two EXIM banks, well known in Pakistan, were the Export-Import Bank of the United States of America and the Export-Import Bank of Japan. The JEXIM was merged with OECF in 1999 to form Japan Bank for International Cooperation (JBIC), while the US-EXIM is still operative. US-EXIM has been for the last about 70 years promoting USA exports and is creating jobs for the American people by offering a number of products and services including limited recourse project finance. However, one must remember the high-value USA capability for manufacture of power plants, industrial plants, telecommunication equipment, aircrafts, naval ships, etc. the exports of which are promoted by US-EXIM. Japan has a different composition of its imports from that of USA. However, Japan has high-value manufacturing capability similar to USA and now the JBIC is providing facilities such as export finance, insurance and loan guarantees.
The charter, strategy and functions of the Export Import Bank of India could be more relevant for determining the desirability and feasibility of an import-export bank for Pakistan. Set up under an Act of 1981, EXIM-India is owned by the government. It was established for providing financial assistance to exporters and importers, and for functioning as the principal institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country's international trade. It provides a range of financing programmes including facilities such as forfeiting, underwriting of issues and import finance through lines of credit from other export credit agencies. Also equity finance is made available for acquiring or setting up companies abroad. Foreign governments and agencies are offered buyer's credit and lines of credit. It provides rediscounting and refinance facilities to commercial banks in India and participates in guarantees issued by commercial banks on behalf of project exporters. Unlike some other EXIM banks, it has profitable operations.
At present commercial banks in Pakistan are handling SBP's Export Finance Schemes, both for Pre and Post Shipment. Commercial banks reap substantial gains from the import-export business. Pakistan Export Finance Guarantee Agency has also started offering useful service. Introduction of a major competitor would probably reduce the share of the apple pie to all. Islamic Development Bank (IDB), Jeddah also finances certain oil or other imports into Pakistan. Large financial resources are required to finance large import-export or project finance deals. Pakistan is yet struggling for attaining such a comfortable position. With its meager resource base, it would not be easy to outclass the regional banks in the financing of such trade. The government and the SBP are urged to consider the factors discussed above for reaching a decision on the viability of an export-import bank for the country.