SBP came up with a number of concessionary financing schemes along with 625 bps cut in policy rate to stimulate the economy in response to the economic slowdown. Overall impact of this is estimated by SBP at Rs1,580 billion (3.8% of GDP). One of the most impactful schemes where impact can go beyond short-term support is the Temporary Economic Relief Facility (TERF). This is for machinery, plants or other component financing for new projects or expansion of existing ones.
Earlier when it was launched on 17th March 2020 at 7 percent pricing for maximum per project limit of Rs5 billion, the first response from the market was lackluster. The overall sentiment was bearish and the scheme did not include financing of BMR. Only forty-four loan application (Rs50bn) were received in the following two months, with approvals granted by only two banks, amounting to a paltry Rs600 million.
The SBP, on industries request, included BMR activities in the scheme on 8th May 2020 including new domestic plants and machinery buying. The projects applications almost doubled between 15th May to 10th July with total loan amounts request at Rs66 billion. By that time, 27 projects loans were approved by banks amounting to Rs11 billion. Activity was picking up, yet the response was not overwhelming.
On 8th July, the maximum rate of financing was reduced to 5 percent from earlier 7 percent. This was to give an extra push as between March 17th and July 10th, SBP further reduced the policy rate by 550 bps to 7 percent.
With economic confidence rebuilding, and overall recovery, demand began to grow for expansion and new projects under TERF. From 10th July to 17th Sep, project loans request almost tripled from 85 to 212. The loans request amount increased from Rs66 billion to Rs212 billion. And the accepted loans have grown over 7 times to reach Rs78 billion. The number is still growing, and the facility is available for businesses to avail till 31st March 2021.
Some leading industrialist are happy with this scheme and many are still applying. Many textile players are using this facility for expanding exports and for import substitution in the value chain - by increasing manufacturing of yarn and weaving to reduce the imported material (after processing) for exports of made-up textiles. One new auto assembler is of the view that the company may use this scheme for localization of parts in-house. In cement, some may use this facility to expand in South to meet growing demand of clinker exports.
TERF is clearly helping the manufacturing base to grow. Earlier, such concessionary schemes were available for exporting sectors only. Now it is open for economy wide – mainly for manufacturing. This scheme is surely giving a much-needed push; but it is not enough to unlock the manufacturing potential. For that to happen, energy puzzle – seamless availability at affordable prices, must be resolved. All eyes are on Islamabad to start working on energy sector deregulation, as there is a limit that the central bank in Karachi can do.