EDITORIAL: Temporary Economic Refinance Facility (TERF) was a concessionary finance scheme that was offered to businesses and industries by State Bank of Pakistan (SBP) in response to the Covid pandemic challenge.
The scheme that was offered through banks had the main objective of allowing businesses to not delay their capital investment plans. Ever since the scheme was offered, there have been controversies and conspiracy theories circling around it. And lately, the issue has resulted in heated arguments at the Public Accounts Committee (PAC) of National Assembly.
It appears that there are misconceptions and misapprehensions because of which some critics are trying to make a mountain out of a molehill here. TERF was a targeted concessionary financing window to promote industrial expansion in a country where the industrial base is woefully small.
It was a welcome move at a time when the economic outlook was getting bleaker. However, that doesn’t mean there wasn’t any misuse, as is the case with some other concessionary finance facilities such as LTFF (long-term financing facility) and ERF (export refinance facility). Insofar as the government’s or the central bank leadership’s intent was concerned, it was kosher and above board or legitimate, so to speak.
When TERF scheme was announced, the SBP was already under pressure (from businesses) for its delayed response to a grim and unanticipated situation the outbreak of the pandemic had caused, requiring it to lower the interest rates.
However, TERF offered edgy business groups and industrialist much greater relief through much lower interest rates as compared to those the Monetary Policy Committee of SBP had been announcing as key policy rate from time to time. Ultimately, the institution won hearts of many industrialists and businesses.
When TERF was offered, it was initially for new investments – green field and expansion. However, due to pressure from the business community, it was later allowed for Balancing Modernization and Replacement (BMR) as well. To begin with, the scheme was capped at Rs170 billion, as per the soft agreement with the IMF.
However, later on, the cap was increased and eventually Rs436 billion worth of loans were approved as against the requests for Rs690 billion. The actual loaned amount was Rs425 billion, and not all of it has been disbursed thus far.
Although the SBP did make some changes, as the scheme gained traction within business groups, but the central bank resolutely refused unfair demands. TERF was disbursed for purchasing plants and machinery — whether imported or locally manufactured — and payments were made through Letters of Credit.
There was pressure from businesses to include the civil works to house the plants and machinery, which the SBP refused. The rule of thumb is that a similar amount of investment is to be made in land, civil works and other heads equal to the amount used for machinery imports.
Thus, the total investment is around Rs 850 billion against the loans for plants and machinery of Rs 425 billion. And that has expanded exports and created new jobs opportunities.
For example, one group invested in Truck and Bus Radial Tyres through TERF. This not only helped to replace the imports (mainly smuggling) but it has also created an avenue for exports, as they have also partnered with a Chinese firm.
The biggest sector that benefited from TERF is textiles — mainly for exports. In the local market, industrialists have expanded and upgraded their plants to cater to new markets and to bring efficiencies.
The other important aspect that needs to be emphasized is the timings of TERF scheme and the prevailing business sentiment during the pandemic. It was the peak of Covid, and no one was interested in making investment or employing new capital. TERF did the trick and changed the sentiment.
Now, in hindsight, there is criticism that it increased the import bill and offered loans at extremely low rates. When viewed in the context of the prevalent interest rates during the pandemic and the quantum of the TERF funds within the overall imports, both of these objections lose their relevance as they arise out of lack of proper appreciation of the abnormal environment obtaining at that time when even the richest of countries were struggling with their economies and the IMF too allowed a major monetary easing to Pakistan under its ongoing programme.
There is, however, a lesson to be learnt in the light of this scheme and other concessional finance schemes. They should be phased out in a manner that investment keeps coming in on an ongoing basis instead of high volumes in a short span of time.
Furthermore, there needs to be strict monitoring with limits on aggregate sector and business groups. There is always room to learn; but bashing such schemes for political point-scoring is unwarranted and counterproductive. That will only dampen investor sentiment. Moreover, you cannot reinvent the wheels of history.
Copyright Business Recorder, 2023