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The past two years have witnessed a love-hate rollercoaster between the central bank and the business community. First, the monetary tightening cycle of autumn 2018 led to harsh words from the industry for SBP; followed by a mad rush of monetary stimulus that earned its top management ‘messiah’ status. The tides (and tones) are changing once again, even as the central bank attempts to calms down nerves, stressing that change will be ‘gradual and measured’.

As the honeymoon phase of TERF fizzles out (and markup payments come due), higher commodity prices will increase pressure on working capital requirement of manufacturing sectors. Wild growth in loans to private sector between Aug and Sep ’21 (Rs270 billion) seems to have kicked in right before monetary policy reversed gears. It doesn’t help that concessionary working capital loans extended to exporters are also rumoured to have been maxed out, with commercial bankers insisting that no increase in limit may be in sight.

But considering that a current account crisis is always lurking around the corner, an argument can be made that exporting sectors can use all the help that they can get to fetch the much-needed foreign exchange. Textile lobbyists – for example – are quick to draw a correlation between the 15 percent rise in sector exports (value) during FY21, and the Rs100 billion increase in refinance limits for exporting sectors back in August 2020. (For more, read “Measuring the impact of concessionary finance to exporters’ published on October 21st, 2021)

Of course, the argument can be turned on its head. One might point out that much of the $1.5 - $2 billion (depending upon base) increase in textile exports came on the back of increase in concessionary working capital, which rose by nearly two-thirds in dollar terms between June-19 and June-21. It may then be logical to ask whether the central bank can afford to enhance EFS limits indefinitely to support export growth? (For more, read “Is SBP footing the bill for export growth?” published on August 13th, 2021).

In this backdrop, BR Research has made a conceptual attempt to measure the cost of Export Finance Scheme for textile. The sector has been selected for the sake of simplicity and ease of comparison with sectoral export earnings (value-added segments only). Researchers may run similar exercises for other exporting sectors as well.

Before explaining the results, it is important to emphasize few caveats. The mark-up amounts calculated are only estimates, as actual data could not be found (or is unavailable). SBP’s annual financials do not disclose facility-wise markup accrual. Moreover, 6-month average of EFS outstanding has been used to estimate markup, instead of gross disbursement, due to widespread practice of pre-payment and rollover before 180 days. (For more detail regarding methodology employed, read disclaimer accompanying the infographic).

Although headline numbers suggest that EFS to textile has doubled in (Pak Rupees) over the past 3.5 years, the reality is not very cut and dry. An increase in working capital requirement of exporting sectors proportionate to the massive currency devaluation witnessed during the intervening period is only natural.

But more importantly, while the stock of loans extended under concessionary finance has expanded massively, the markup differential borne by the SBP (policy rate minus refinance rate) appeared to be on a decline after peaking in H2-CY19 (both in rupee and dollar terms). This indicates that while the rise in export earnings may have very well been financed by the concessionary loan schemes, incremental earnings cost less today than they did a year ago. But this may soon change.

As SBP begins to raise the policy rate (albeit slowly and gradually) the differential between the policy rate and the refinance rate will rise; thus, every incremental dollar earned will cost more. (This is based on the assumption that the central bank will not increase refinance rate along with policy rate). Thus, while SBP may very well not reduce its exposure under EFS, the rising differential cost may very well factor into its decision to raise the limit, to the disappointment of exporting sectors.

The million-dollar question then is: can export growth momentum continue without EFS enhancement? The global commodity price spiral may offer a temporary reprieve (as commodity prices trickle down into export unit prices). But can the volume growth persist too without an increase in concessionary credit? Let’s see who wins the next round of staring contest between SBP and exporters.


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