SBP to extricate itself from export refinance scheme: 'banks will continue to provide loans'

The State Bank of Pakistan (SBP) has decided to extricate itself from export refinance scheme but it will be phased out over a period of time and will be a part of the central bank's monitory policy.
In an Exclusive interview to Business Recorder Governor SBP Dr Shamshad Akhtar said that refinancing has contributed excessively to reserve money growth this year it has caused an exceptional increase. Though there are other monetary instruments available with the central bank but top preferences would be to eliminate refinancing. She added that this would not affect the industrial sector at all because industries will continue to get export credit on the same terms and conditions.
Despite elimination of refinance scheme, banks will continue to provide loans on low rate for exports from their own funds and the difference will be paid by the government, she said. Banks will continue to provide export credit at 7.5 percent and the State Bank will decide what differential will be paid to the banks, she added.
Dr Akhtar said that next financial year's budget is a public budget. This is an election year budget but at the same time it has been recognised what is the need of the masses and the same has been taken care of in the budget. She said that it was satisfying that different segments of society have been adequately provided for in the budget.
There is no doubt that food prices are on the higher side, it is partly for this reason that industrial, corporate and industrial employees' salaries have been increased to compensate for the cost of living.
On the other hand, some measures for availability of essential items for common man on lower rates from the utility stores has also been announced in the budget. If we look at the industrial and the agriculture sectors, for each sector there is something critical, she said and added that today's industrial sector's need is diversification.
There is some tariff rationalisation and incentives in the budget, which supposedly may add to industrial growth. For agriculture sector there is subsidy on DAP has which would have a visible impact on the performance of the agricultural sector this year, she added.
"I think there is a lot of real sector measures and there is lot of public response for giving adequate compensation to the people for the high food prices," she said. A prompt reform agenda to strengthen the financial sector is also on the anvil, governor SBP said. On the fiscal side, there is an attempt to contain fiscal deficit at 4.2 percent or even lower, she said.
She said that current expenditure's share in the total expenditure is declining, while the development expenditure has been increased to Rs 520 billion. A number of countries have also been able to tackle the fiscal deficit more than we have and India is also worse off than we are, Dr Akhtar said.
If you have private sector wages, different level is going up not to give your low income employees and adequate compensation, which is consistent with the overall level of the price increases we have, she said.
Public investments have to be accommodated in the fiscal deficit, as we have clarified to the government that we will have to minimise its reliance on central bank browning. There has been very effective communication from the central bank to the federal government and the government has understood our view-point, governor SBP said.
For reduction in the central bank browning, SBP is conducting communication for the last few years but this year serious communication has been exchanged between SBP and the federal government, she said.
The central bank chief said that the government has announced Rs 130.9 billion bank borrowing for the next fiscal. The central bank aims to negotiate with the ministry of finance what would be making the quarterly negotiations of this borrowing.
'We would like to sit down with the ministry of finance and will do a round of technical level consideration,' she added. In our communication with the government, we would like the government to reduce its dependence on the central bank borrowing this year. They should resort more on non bank browning sources including sales of PIBs, the modalities will be discussed soon, she maintained.
The government borrowed Rs 80 billion from the SBP during the last fiscal year against the target of Rs 120 billion, governor SBP pointed out.
Replying to a question, about banks or non banks share in PIB, she said that in the first phase PIBs go to the primary dealers but after that they go to the secondary market, adding that non banks can have recourse in the secondary market to purchase PIBs.
Dr Akhtar said export refinance is not giving any impetus to exports. The decision to allow export of edibles is undoubtedly made by the government but when the wheat export matter came up, the government decided to retrieve on its decision to avoid its impact on local prices.
The fact is that the SBP does not provide refinance on its own accounts but follows government's decision, whether they want to discourage exports of some products or not, she said.
Export refinancing is not a healthy thing but since traditionally we have been giving refinancing we have to give until we decide as a policy to stop it she added. She said that SBP has stopped the LTE-EOP scheme to the value-added textile sector and no such refinancing will be provided under the scheme anymore.
The SBP had issued Rs 87 billion of PIBs during the last fiscal out of which around 60 percent was held by non-banking, the central bank chief said. Talking about exchange rate, she said that it is not clear that the exchange rate will continue depreciating at the current level. It even may come down. I don't think that there is any indication that every year it will depreciate.
She said that foreign direct investment is not coming due to interest rate differential FDI is coming in because of the very high corporate and banking sector profitability.
She said that interest rate differential is not the determining factor in the environment we are adding that the country's corporate and banking sector's profitability is in double-digits. We should not forget that despite political instability foreign investors are investing their capital in Pakistan.
Governor SBP said that foreign investment is not taking place in the manufacturing sectors due to inefficiencies, adding that industrial and manufacturing sectors are not doing enough to attract foreign investment.
She said that foreign investment has been seen in the power sector and infrastructure besides corporate banking sector. Pakistan continues floating sovereign bonds because that keeps Pakistan's name in the international bond market.
It is setting a benchmark, which is helping other corporate issues. Thirdly, it tells the public world-wide that despite all the political crisis, Pakistan is able to raise long term funding in the international market, she said.
"We are not looking at Pakistan today only. We are looking Pakistan over a longer perspective and have in the process achieved an investment grade. Pakistan's image is improving in the international market after the issuance of sovereign bonds abroad," Dr Akhtar added.
The government has brought OGDC in the international financial market to enhance its investment grade and for this purpose the government has geared up its balance sheet according to international standards, she informed. We want to bring Wapda in the international market by issuing its GDRs but it needs hard work.
If Wapda had strong balance sheet, we would definitely bring it in the international market, she said. Adding, that when the PSO will be privatised then we will be able to issue its GDRs in the international market.
When we took OGDC in the international market it became a brand name for international investment. To achieve more, we will issue more than two or three GDRs in the international market, she added. Having achieved this we will see that a large part will be financed outside sources or equity market.
Talking of the overdraft, she said provincial balances are manageable row. The provincial governments are doing pretty well and overdraft of Sindh is in the surplus position while Balochistan is also settled a major amount.
She said that amongst the overdrafts, Railway is alarming one. We have to stop allowing further overdraft, if Railways revenue's picture has to improve.
For the sustainability of the financial sector we need to continue diversifying both at sector level and at regional level and reaching all segment of the population, governor SBP said.
Banks must get out of the urban area and start opening more and more branches in rural and new urban areas. We would have to train our people in the banking industry to enhance the banking sector efficiency and profitability. There are lot of opportunities of innovation in the Islamic-banking sector, she said.
She said we should encourage banks to finance by 100 percent of exports with own funds besides the long term funding. Export refinancing is unnecessary and burdensome. All countries are dependant world-wide. Even our neighbouring country India has abolished export refinance and now they are providing interest rate differential, she said.
The banking sector will not be supported artificially nor artificial support is viable. Banking sector is totally liberated but banking sector has to mobilise funds to finance export flows on annual basis themselves, she said.
Dr Akhtar said that the central bank has instructed to the banks to be transparent both on the lending and deposit sides and banks have started increasing deposit profits but they are still at an unsatisfactory level.
She said we have ended export refinancing to the textile sector. This is much tricky. Therefore, we have proposed for spinning sector that we are not going to provide refinancing but the banks may convert exiting loans into three percent lower than the market rate.
The SBP wants to bring a positive change in the monetary policy to take out every inflationary element from its monetary policy, which is contributing to inflation, she added.
Reserve money growth is under pressure due to refinance. Therefore we need to eliminate it hopefully at some point in time but this will not be an easy decision, she admitted.