TERF (temporary economic refinance facility) was a hot topic last week. The scheme was offered at the time of Covid distress and was for the purpose of capital formation and industrial promotion in a country where long-term capital investment is rare.
No wonder the scheme was offered hurriedly (but that was in line with many other economies’ respond to the Covid). The scheme could have been better designed and it should be critically evaluated to learn for future- but it should not be seen as a crime, and the evaluation should be done by economists and policy makers, not be agencies.
When TERF was offered, there was an urgency on how to control the economy during an unprecedented crisis. SBP was thinking about a bunch of options, and the central bank came up with several responses, apart from slashing the interest rates from 13 percent to 7 percent. These include, loan principal payment deferment, subsidized credit for salaries disbursement, subsidized credit for health sector, and TERF.
TERF was unique in the sense that it attempted to kill two birds with one stone. One was to improve the investor confidence and other was to provide long-term finance. The banking sector usually does not provide long-term financing to Pakistanis, and that is important for investment to grow.
The criticism on TERF is in retrospect. Not many today are evaluating the conditions and sentiments back then. At that time, everyone was pushing the government to go for a complete lockdown. SBP (State Bank of Pakistan) was under immense pressure to lower the interest rates, further.
And when the TERF was offered people were laughing that who would invest in such times when global demand and commodities prices were nosediving. And now when many benefited from TERF, people are criticizing that it was too mouthwatering.
Timing was not on policy-makers side at the time of TERF offing. Globally, unprecedented easing was in the offing. The Bank of England was asking banks whether they were ready for negative real interest rates. Germany was not much different.
In hindsight, people are comparing it with current rates. Hindsight is always perfect. One can make a perfect stock market strategy to become trillionaire by making stock portfolios in retrospect, by buying at lowest point and selling at top and then by short selling.
When TERF was offered there was a tight fiscal policy, and a loose monetary policy was in the offing. Things were going fine. The tables turned when the fiscal side became expansionary in FY22 and later the global crisis along with domestic political crisis worsened the situation.
The criticism of the TERF is that public money is being used to finance a selected few. First, the credit decision was for commercial banks. It was not of the central bank which took risk on banks. And commercial banks usually offer credit to the top business groups, and many of those were beneficiaries of TERF as well. There appears no political favoring as those business groups, who are close to the then opposition (today’s government), too, got TERF.
The other misconception people have is that there are fiscal implications of TERF in terms of less SBP profits, or it is adding to the public debt, and eventually the subsidy is coming from taxpayers.
That is not correct. SBP had created liquidity which was absent otherwise. It’s a form of quantitative easing where the money is pumped into the system through central bank. And it’s better than buying government papers by the central bank from the market, as it was targeted to create long-term investment in the private sector. Otherwise, OMO (open market operation) injections are creating liquidity too.
Then TERF was offered to medium-size businesses as well, as more than half of loans were of value less than Rs500 million. However, the bigger chunks were offered to bigger groups. That is consistent with market-based commercial banks’ lending and is imperative for attaining economies of scale. Some say SBP should have been targeted it further; but SBP did not want to get involved in credit decision.
There were more chances of abuse in that. Then TERF was like LTFF (long-term financing facility) in terms of concessionary rates at that time with a difference that LTFF is being offered to exporting businesses only.
SBP decided to not choose the winners and let the market decides whom to take loans. The only condition was that it must be for new plant and machinery. However, in the process, rent-seeking businesses (such as automobile) got the loans. In some cases, people made expansion for next ten years to benefit from low rates.
Having said that, there are loans which have opened new avenues of exports and of import substitution. One example is making truck and bus radial tyres where American trucks are using tyres from Pakistan.
In another example, one group in candy-making business has invested in nutrition formula that is to be used in milk and other food products and to help address the stunting problem, and that group is now exporting it too. Then some have invested in syringe-making to substitute imports. And there are some other good examples.
Apart from TERF, later SBP came up with SAAF (SME Asaan Finance) concessionary scheme for SMEs where lending decision was supposed to be on cashflow basis. However, when the government changed hands, that good scheme was shelved. No one is criticizing that. Then the affordable housing concessionary scheme was halved too where the allocated subsidy was a mere Rs19 billion – less than the government is paying a day on debt servicing today.
The bigger picture to see in TERF fiasco is that it was not a decision of one or two individuals; it was an institutional policy of SBP, and it should not be politicized. There was involvement of SBP Governor, deputy Governors, executive directors and others. Undue bashing is forcing SBP to do nothing at the time of the need.
At the time of change in SBP Act, the in-house team sustained the pressure of IMF (International Monetary Fund) to keep the concessionary financing option in the SBP domain.
As with such schemes, SBP offers concessionary finance to banks with certain terms and conditions, based on the desired objectives, and to have targeted support. And central bank is the only institution that could do so. However, with such heavy criticism and bashing, SBP may refrain in future to be innovative. Not a good omen.
Copyright Business Recorder, 2023
Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar
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