Subsidy on interest rates

For a long time, the subsidy in Pakistan remained mainly for affluent consumption and the poor had to pay more – such as lower gas prices for pipeline versus LPG, subsidized NSS rates for those who can save, lower petrol and diesel prices relative to neighbors, agriculture support price for big farmers to name a few. Now the consumption-based subsidies are moving towards the deserving – such as cash disbursement through Ehsaas, and similar treatment is sought for electricity subsidies for marginal consumers.

The other element is to provide subsidy to enhance the manufacturing base. The government is providing subsidy for expansion and incremental production – such as subsidy to SMEs on incremental electricity consumption and at marginal cost for large customers. Such kind of subsidies are good. One worthy scheme that needs to be talked about is SBP’s TERF (Temporary Economic Refinance Facility).

In TERF, SBP provides refinance facility to banks at 1 percent to lend (at maximum rate of 5%) to businesses for the purpose of new imported and locally manufactured plants and machinery for setting up new projects and BMR or expansion for existing projects/businesses. This scheme is purely for industrial expansion. This scheme cannot be misused as it has to be financed against LCs. While in other schemes like ERF or LTFF, misuse has been recorded.

The SBP is providing subsidy on interest rates – it is standing at 6 percent at the prevailing policy rate of 7 percent. But its benefits could be much higher. For example, if someone is financing Rs1 billion for importing plant and machinery for new factory or expansion in existing, the person would be, as a rule of thumb, putting up Rs1 billion from own equity in creating physical and human infrastructure for that plant. The subsidy amount would be Rs 6million per annum (6 percent interest subsidy on Rs1 billion) and on this subsidy an investment of Rs2 billion in being made for long term.

It’s an excellent result in an economy that is used to unproductive subsidies for consumption purposes. This will help in boosting the industrial expansion. Since its launch in April, to date, Rs186 billion of financing has been approved for 240 projects. The financing requests received by commercial banks is Rs415 billion for 408 projects. It is banks’ prerogative to finance or not as the risk lies with banks. The number is growing every week and approved financing may soon cross Rs200 billion.

To date, the disbursement stands at Rs16 billion. This number is ought to grow fast to match the approved financing in a few months. Most of these financing is against import of plant and machinery. This will put pressure of over $1 billion imports in machinery, and this number will grow, with approvals of pending projects. Some of the projects will be rejected by banks and some would not fit into the SBP’s stated policy for the particular subsidy.

The scheme is available till 31st March 2021, and the financing would be up to ten years. Many industrialists BR Research speaks to are using this facility. These include exporters (such as textile) and manufacturers catering for the domestic market. Everyone is happy, and a few have decided to expand just based on low rates for long term financing. In Pakistan, the average rate of KIBOR stood at 9.4 percent for the past ten years, and the volatility in the rate – ranging from 6 percent to 14 percent, was the killer. Now people are making this investment and its return will be enjoyed by the next generation.