SBP: hiding behind phantoms

Policy discourse must always make room for objective assessment of goals set, and results achieved.The primary problem with the current inquiry into SBP’s Covid era actions is Bank’s unwillingness to open itself up to dialogue and feedback. While SBP’s management expects appreciation for its initiative taking, it does not want to be held accountable for mistakes and failures.

Over the past few years, SBP’s actions have received criticism in the press over various actions such as attracting hot money flows, changing goal posts for policy rate setting from core to headline inflation, forward guidance, Covid era lending programs, SBP autonomy bill, wage-price spiral, medium term inflation target, reappearance of CAD and demand induced inflation during H1-FY22, among others.

But disagreements over policy actions need not turn into questions over professional credibility. Unfortunately, SBP’s reluctance to engage with constructive criticism made at the time is precisely what has given space to its detractors today to make politically motivated accusations of collusion, conspiracy, and fraud. Clearly, the current spate of attacks on SBP’s credibility does not care for constructive dialogue, but only in political chest-thumping. And like all inquiries undertaken by the organs of state, the latest episode too will come to bite the dust in archives. However, questions over governance, accountability, and oversight will remain unanswered.

The questions raised on the structure and design of the Temporary Economic Refinance Facility (TERF) scheme are not new. The way this scheme was managed left many questions unanswered. These questions were put forward many times since the inception of the scheme, but unfortunately, SBP refused to engage with critical sections of the press at the time, maybe because answering these questions would have revealed the gaps in SBP’s decision-making process, leading to uncomfortable conclusions. It is both unfair and disappointing that the Bank’s leadership and its cheerleaders are insistent that “criticism is being made in retrospect”.For the sake of record, this article puts together the list of questions– which were put forward many times before – during the course of the scheme as well.

Past research by Haque (2007) and Varela,et al (2019) has shown that refinance schemes have a poor track record and fail to meet their objectives. For example, research shows that schemes such as Export Refinance and Long-Term Finance Facility (LTFF) that target export-oriented industries, failed to have a substantial impact on the export performance of beneficiary firms. Although Pakistan has over 15,000+ exporting firms, research findings shows that no more than 125 firms (2017) benefit from LTFF, and only 814 firms from EFS (2017) on average, annually, with significant overlap between beneficiaries of these schemes. Similarly, only 628 firms benefited from TERF during 2020-2021. This raises several questions on the policy design, deliberation, process-flow, and evaluation of TERF:

1. Did SBP conduct any impact assessment study of its past concessionary finance programs before selecting TERF as the policy vehicle to support economy during Covid?

2. Covid posed economy-wide risks. Did SBP build any safety-valves to ensure that benefit of Covid-era lending programs such as TERF were accrued by firms beyond those who were already beneficiaries of other ongoing concessionary finance schemes?

3. When TERF was announced, many segments within the private sector were already availing refinance schemes such as Refinance for Renewable Energy (RFRE), LTFF, and Export Refinance. Did SBP make any attempts to ensure that TERF enabled access to finance for firms that had previously not availed concessionary refinance?

4. What percentage of TERF was availed by firms that had in the past also availed LTFF? Was any criteria set for past performance assessment before allowing fresh concessionary finance to these firms?

5. Of the total number of firms that finally availed TERF, how many firms had not availed any concessionary finance scheme in the past?

6. Lending under schemes such as LTFF and Renewable Energy continued simultaneously with TERF. Were rules set down to ensure that firms already availing these schemes did not also avail concessionary finance under TERF?

7. Why were sectors that already had access to LTFF not disallowed from availing finance under TERF? Why were some firms able to access LTFF, RFRE, and TERF simultaneously?

TERF was intended to be sector neutral. Instead, according to private sector credit data by SBP, between 40 – 45 percent of loans under the scheme went to Textile+Apparel segments, which have been the greatest beneficiaries of other refinance schemes in the past as well. In fact, the share of Textile in TERF was substantially over-indexed compared to its share in overall private sector credit, which is just 25 percent.

8. This was highlighted earlier on during the course of the scheme. Would SBP have been better advised to impose industry-wise limits to ensure that the benefits of the scheme were spread across other sectors of the economy?

9. In many cases, multiple TERF loans were availed by entities of the same sponsor group. Did SBP attempt to ensure that per party and per group limits were imposed on availing of concessionary finance so that benefits under the scheme were not accrued by select few business families?

10. It is argued that TERF was provided as commercial banks are otherwise reluctant to offer long term loans to private sector firms. Does SBP have a record of firms that were refused long term commercial loans by banks? Were these firms accommodated by banks under the TERF scheme subsequently?

11. Has SBP maintained a record of capacity expansions, new investments, and BMR projects undertaken under the TERF scheme? What are the statistics of industry-wise capacity increases because of TERF? Can this information be made public?

12. Pakistan has witnessed past episodes where clubbing capex in a short period causes strain on current account balance due to machinery imports, leading to a BoP crisis. This had already happened in recent past due to CPEC machinery imports in 2016-2018. Was it a good idea to repeat that experiment by sanctioning all TERF loans in under 1 year? Did this structure – at least in part – not lead to re-appearance of current account deficit in H1-FY22? For future policymaking, would it be better to spread out such initiatives over a longer period to avoid the tendency towards boom-bust?

13. History suggests that in import-led economies such as Pakistan, periods of loose monetary policy settings are followed soon after by sharp policy tightening. Now that TERF capacities are installed, Kibor has reached 23 percent, meaning that working capital finance required to run the new capacities has become prohibitively expensive. Market reports suggest that these capacities now stand idle, meaning many firms are making debt repayments without generating cashflow. Should Pakistan’s short economic cycles not have cautioned SBP against fueling an investment boom that felt more similar to a “limited time offer” or Boxing Day sales?

14. The SBP autonomy bill was first presented in March 2021, around the same time when TERF craze was at its peak. Early drafts of autonomy bill proposed removing refinance schemes from SBP’s mandate, as refinance schemes ran contrary to Bank’s primary mandate per IMF (but was later retained due to lobbying by leading trade bodies). If concessionary finance schemes such as TERF are such a successful policy vehicle, why does IMF believe that it leads to distortions?

15. At the time TERF was announced in May 2020, the world was still under lockdown, with no vaccine in sight. The greatest risk to the economy at the time was mass unemployment due to demand slowdown. How did SBP conclude that pouring in cash for capex was the best way to mitigate these risks when it wasn’t even clear how long it might take to return to normalcy?

16. Beneficiary firms under TERF and other Covid-era refinance programs began restricting salary payments and laying off employees right after the economy began overheating beginning mid-2022. Meanwhile, TERF loans were allowed for up to 10 years, meaning these firms may benefit under the scheme for up to a decade. Did SBP build any safety valves to restrict beneficiary firms from downsizing during the course of the scheme?

17. Has any impact study been undertaken to measure the success of TERF loans? Has TERF raised productivity and efficiency of plant and machinery in any measurable way? Why can this information not be made public?

Asking for openness in policy making is not same as raising questions over SBP’s credibility or integrity. SBP has only hurt itself by refusing to engage with observers, as dialogue could have enabled more informed policy making in future. Instead, time and again, the Bank chooses to lobby the mediaand trade organizations for image building and endorsement.

All public sector institutions should be made answerable for the design, deliberation, and efficacy of their policies and actions. Demanding transparency over decision making process is not same as casting aspersions over professional credibility. Let us not allow truth to become a casualty by giving space to phantom allegations.