Last week, SBP enhanced the scope of its concessionary working capital refinance program - Export Finance Scheme (EFS) - to include rupee-based bill discounting/export receivables. The move has been widely welcomed by both bankers and exporters as innovative. But will it truly address the criticism that had earlier been aimed at concessionary refinance schemes and their perceived abuse?
BR Research disagrees. But first, a quick explanation of what this latest wave of incentives for exporters (as well as commercial banks!) means. Back in Aug-20, SBP enhanced EFS limit from Rs 500 billion to Rs 700 billion to prop up Pakistan’s exports at the height of Covid-19 pandemic. Evidently, the cheap working capital bonanza delivered on its objective. In FY21, textile exports increased by $2 billion, against incremental disbursement of EFS loans worth $1Bn, compared to pre-pandemic year (FY19).
Since then, EFS limits have been maxed out, with no additional enhancements beyond Rs 700 billion. During that time, the focus of concessionary refinance facilities also shifted elsewhere, as SBP rolled out its red-carpet for investment promotion in the form Rs 400 billion + long-term concessionary scheme – TERF. Meanwhile, since EFS is a PKR denominated facility, the 10 percent currency depreciation since July 2021 meant that working capital loans were worth that much less at the time of roll over, making exporters clamour for limit enhancement.
But to little avail. On one hand, the chatter surrounding SBP’s autonomy bill set off rumour mills that the Fund wants to tighten screws on refinance schemes, and unwind the monetary stimulus extended during pandemic (whatever that means!). On the other hand, news reports suggested that IMF has asked SBP and MoF to offload exposure against refinance facilities off SBP’s books and establish a DFI for this purpose.
It almost looked as if the era of concessionary lending was over. Until SBP came out with a fresh set of restrictions on exporters, which made it look like it was ready to put the house on fire.
Faced with (politically motivated) criticism over slide in Rupee, last month SBP reduced the allowable period for exports proceeds realization from 180 days to 120 days, for “all exporters”, irrespective of whether they had availed SBP-backed EFS facilities to finance cash cycle or not. Exporters of all shades and sizes were up in arms: not only was SBP not going to further enhance refinance limits, it blamed exporters for currency depreciation (by implication). How?
The new restriction implied that earlier exporters held (either by design or consequence) export proceeds abroad for maximum allowable period (i.e. 180 days) to take advantage of currency depreciation, while financing their cash cycle through SBP’s cheap refinance loans. This would be possible either if exporters sold their goods to sister-concerns set up abroad, or by extending lax payment terms (i.e. longer repayment period) to buyers in exchange for better pricing. Both are theoretical possibilities but are virtually impossible to prove.
And so, in order to put an end to exporters’ “party” (as it was termed by some commentators at the time) on taxpayer dollar, SBP reduced proceeds realization period across the board from six to four months. As exporters turned hostile, SBP turned to damage control mode, allowing various exceptions to the four-month limit on case-to-case basis. But it wasn’t over for exporters, who still wanted their limit enhancements. So SBP had to get creative, extending the scope of EFS to include bill discounting facility.
And innovative it is. Banks have been asked to deploy their dollar deposits to extend bill discounting facilities to exporters, against which SBP will extend refinancing to banks at 1 to 2 percent (which will in turn permit banks to reduce pricing for end-customer). Because bill discounting is receivable backed, the incremental exposure will be self-liquidating in theory, compared to the Rs 700 billion already outstanding against EFS that has turned hardcore (incidentally, also keeping in line with IMF’s requirement to gradually phase out scope of refinance schemes).
However, does the change in EFS structure address the long-standing criticism on the efficacy of these schemes? Not by a long shot. As Nadeem ul Haque (2008), Gonzalo Varela et al. (2019), have shown, EFS has little to no correlation with long term increase in country’s exports.
But even more importantly, the latest “improvement” is blatantly unfair, and will do nothing to enhance the scope of concessionary loan scheme beyond the usual suspects (i.e. baday ghar of textile; and more broadly, big sponsor groups in the country).
Why? As it stands today, exporters who will utilize the refinance-backed bill discounting facility are free to extend credit period up to 180 days to their buyers. On the other hand, export bills not discounted on banks’ counters must be realized within 120 days (as before). Simply put, if an exporter finances his receivable using bank loan on cheap SBP-backed pricing, they may bring back proceeds in six months. While those who self-finance their cash cycle must bring back proceeds within four months. Sounds fair?
The inherent bias towards big business in Pakistan’s economic policymaking could not have become more obvious. As banks are free to choose their borrowers (as they should be) based on their risk profile, they have no incentive to extend the scheme to small- or mid-sized exporter. Moreover, because SBP does not share credit risk with the bank (in case of default), banks have every incentive to continue concentrating their exposure with borrowers with established credit history, even when using SBP’s concessionary finance facilities.
It bears emphasizing that Pakistan has over fifteen thousand exporting firms, of which about 800 availed EFS between 2013 – 2018 (later data unavailable). Naturally, these firms belong to big business groups, while many are owned by same sponsor groups (for reference, reader should feel free to google the “three big textile houses” of Pakistan, and the number of exporting companies owned by them).
But was the move necessary? Probably, if the explicit purpose of central bank backed incentive schemes is to bring in dollars in the country. Never mind the inherent inequity at the heart of public policy making. The scheme will almost certainly help create a more stable outlook on currency; offer big business better return sand implied depreciation advantage of Rs 8.32 per dollar and minimize bankers’ currency risk and help incentivize dollar-based lending.
The move also fits well into SBP’s behavioural pattern over the past three years. Back in 2019, it faced severe criticism over excessive monetary tightening, and responded by launching the largest incentive program in country’s history for exporters during the pandemic. Now, it first held exporters responsible for excessive currency volatility. Later, faced with backlash, responded in a reactionary manner, rewarding them to the hilt, even excessively.
The central bank has just won its longstanding demand for autonomy. Here is to hoping that it also secures freedom from its demons, and performs its policymaking functions on basic principles of fairness and equity, rather than buckling under pressure of tiniest criticism.
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