The government’s decision to slash the Export Finance Scheme rate has been dressed up as harmless relief for exporters. In reality, it is a familiar policy sleight of hand. Cheap credit has once again been smuggled into the system under the guise of competitiveness, while policymakers pretend that no one is paying the bill.
The official narrative suggests that commercial banks are absorbing the cost of a three-percentage point cut in EFS lending rates. That claim collapses the moment one looks beyond the press release. Banks are not subsidizing exporters out of goodwill. The cost has been quietly shifted onto the monetary framework itself. A one percentage point reduction in the Cash Reserve Requirement on a banking deposit base exceeding Rs 30 trillion releases enough liquidity to comfortably finance the interest income foregone on roughly Rs 1 trillion of EFS outstanding. The arithmetic is straightforward. This is not bank borne support. It is system wide accommodation.
The timing removes any remaining ambiguity. The announcement came barely a day after the Monetary Policy Committee meeting. This was not coincidence. It was coordination. When targeted credit concessions immediately follow a rate decision, the question that naturally arises is not about export competitiveness, but about the boundaries of monetary autonomy. If policy tightening can be selectively neutralized for preferred sectors, then the distinction between independent monetary policy and fiscal management becomes increasingly cosmetic.
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One could argue, narrowly, that this compromise is preferable to an outright cut in the policy rate. In that sense, the central bank may have succeeded in fending off a more damaging assault on inflation targeting. Targeted distortion is indeed less dangerous than economy wide loosening. But that is a low bar. Avoiding the worst outcome does not make the chosen path sound policy.
The deeper problem is what this move does to monetary transmission and credit behavior. By driving a wider wedge between the policy rate and effective borrowing costs for a chosen segment, the signal to the rest of the economy is diluted. Tight money for most, subsidized money for some. Over time, this erodes credibility and entrenches the belief that interest rates are political variables rather than macroeconomic instruments.
The export impact, meanwhile, is being overstated. Pakistan’s export constraint has never been the last few percentage points of borrowing cost. It is risk, capability, and market access. Cutting the EFS rate does nothing to address these issues. In fact, it likely worsens the problem. As margins on EFS lending compress further, banks will respond predictably. They will retreat deeper into relationship-based lending, concentrating exposure on the safest sponsor groups and established export houses. Inclusion will decline, not improve.
This is precisely the opposite of what a quasi-fiscal export finance scheme should aim to achieve. If the state is intervening in credit markets, it should be absorbing risk where private balance sheets will not, enabling new exporters, new products, and new markets. Instead, the EFS continues to function as a low-cost liquidity channel for incumbents, reinforcing concentration and entrenching the existing export structure.
What makes this more frustrating is that the intellectual case against such refined is already settled. The government and the central bank have both acknowledged that subsidized refinance is quasi fiscal spending that distorts pricing, weakens discipline, and obscures tradeoffs. The stated reform path was to move such support onto the budget and redesign it around risk sharing rather than interest rate subsidies. None of that is reflected here.
Stripped of rhetoric, the EFS rate cut is not a growth strategy. It is a political compromise that preserves appearances while postponing reform. It protects export numbers at the margin, weakens monetary transmission, and concentrates credit even further among those who already have it. Pakistan has seen this movie before. It ends the same way every time.
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