Exactly one year ago, aghast at rumors of exporters holding back receipts abroad to maximize return on currency depreciation, SBP reduced the allowable proceeds realization period from 180 to 120 days back in January 2022. The move attracted a sharp rebuke from exporting industries, who accused SBP of using bullying tactics and forcing exporters to forgo profits in its bid to stabilize the exchange rate. An image-conscious central bank soon went into damage control, offering creative incentives to placate exporters.
What did those incentives entail? Recap to August 2020, when the central bank kicked off an export bonanza by massively expanding working capital concessionary finance, Export Financing Scheme (EFS) from Rs 500 billion to Rs700 billion in a bid to jump-start stalled exports. The move delivered on its objective, raising Pakistan’s goods exports by $3 billion during a global pandemic (FY21). Except, it wasn’t long before IMF came knocking, demanding that the largesse showered at select industries through concessionary finance be capped in order to limit the ever-growing fiscal gap.
Soon after, the exchange rate also changed gears in Q2-FY22, when global inflationary headwinds forced the currency to lose its short-lived stability. Bereft of concessionary working capital and faced with rising markup rates, exporters were left with precious little except anticipation of gains on currency, which was cut short by the reduction in export proceeds realization period from six to four months.
Forced on the backfoot, the central bank came up with an alternate concessionary scheme where it offered refinance to commercial banks against Rupee-backed foreign bill discounting. The scheme was self-liquidating in nature and was designed to ensure that SBP’s overall exposure against concessionary finance would remain capped, while also offering exporters an implied exchange rate benefit of Rs8.32 per dollar on early precede realization. In addition, it allowed exporters to use the scheme to extend the proceeds realization period up to 180 days while keeping the 120 days limit in place for those who did not avail of the scheme.
Did it work? Even a cursory look at the data shows how the scheme turned out to be a spectacular failure. Between Feb 2022 and Dec 2022, the total outstanding against foreign bill discounting extended to all exporters fell by 37 percent, with bill discounting availed by the textile segment declining by a massive 42 percent in dollar terms. Although some may be quick to point out that the fall in dollar terms is intuitive due to significant currency depreciation during the intervening period, rest assured that’s not the full explanation. Total commercial bank exposure in Pak Rupee against foreign bill discounting fell by 20 percent, with the exposure to textiles against the facility declining by a massive 28 percent during the 10-month period in Pak Rupee.
Did it have to turn out this way? Despite SBP celebrating the scheme as a cure-all at the time, it could not have turned out differently. Readers should review “SBP: still not free of its demons”, published on February 21, 2022, in this section, to find out BR Research’s take on the issue at the time. Afraid of backlash from the business community that had only recently fell in love with the central bank’s management during the TERF bonanza, SBP had doled out counterintuitive incentives that were bound to fail at the time of global monetary tightening, when LIBOR had increased to four percent and above from near zero just a year ago.
Fast forward to January 2023, SBP continues to be both quick and awkward in responding to criticism, insisting that its failure to maintain a market-based exchange rate did not result in foregone dollar inflows over the past four months. What the central bank failed to realize at the time – and continues till this day – is that the phenomenal response of goods exports during FY21 came from a very low base, after SBP opened the floodgates of concessionary lending to the private sector, both in working capital and long term. Soon as the taps were turned back off, export performance fell back to equilibrium levels. If SBP is insistent that Pakistan’s exports today have fallen in tandem with global trends, it has only itself to blame for giving select industries a spectacular, yet very artificial stimulus that window-dressed export performance only temporarily.
Over a year ago, SBP won its much-sought autonomy, which according to many critics has maybe made it ‘too independent’, not even accountable to elected representatives. Yet, despite the hard-won independence, it continues to remain overly sensitive to criticism, which in turn reflects in poorly thought-out flip-flops on a policy level, whether on the exchange rate, import compression, or incentives to exporters. A truly independent central bank must do better.
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