KARACHI, March 1: The State Bank has increased the export refinance rate by half a percentage point to 4.5 per cent for March 2005. This means, that eligible exporters will get export financing at 6 per cent from commercial banks during this month. (Banks can charge up to 1.5 percentage point spread over the SBP refinance rate while pricing export loans).
This is the fifth straight increase in the refinance rate in the first three quarters of this fiscal year, and sixth since May 2004 when the central bank first raised the rate after a gap of ten months.
Export refinance rate started moving up as the SBP began tightening treasury bills rates to fight inflation. The refinance rate or the rate at which the SBP reimburses funds to the commercial banks against their lending to eligible exporters is kept almost at par with the weighted average yield on six-month treasury bills.
As the weighted average yield on six-month bills moved up to 4.79 per cent last month, the central bank has fixed the export refinance rate a little lower i.e. 4.5 per cent.
Chances are that the yield on the bills will touch 5 per cent during this month, thereby pushing up export refinance rate for April to that level. In other words, exporters would have to pay 6.5 per cent mark-up on export loans in April, if the SBP does not de-link the refinance rate with the T-bills yield or it does not scrap the scheduled auction of six-month bills on Wednesday.
The central bank plans to sell Rs40 billion worth of these bills and there are indications it would have to increase the yield to reinforce its earlier signals of tightening interest rates to fight inflation.
INFLATION: Year-on-year inflation rose by 8.76 per cent during July-January 2004-05 against the revised full fiscal year target of 7 per cent and initial target of 5 per cent.
The SBP, in its first quarterly report, projected 7.6-8.2 per cent inflation for this fiscal year. The central bank has made it clear in its monetary policy statement for the second half of the current fiscal year (January-June 2005) that it might have to go for faster increase in interest rates to combat inflation.
That it will certainly have to do this is evident from the fact that despite interest rates tightening in the first half of this fiscal year, inflation so far during this year is hovering around 9 per cent, and it may rise further for several reasons, the foremost being the periodical increase in petroleum prices.
The government again increased the prices of petroleum products the other day. This was the fourth upward revision in prices within the last two months and officials did not mince words in admitting that it would have inflationary impact.
Growth in money supply on the back of higher off-take of private sector credit as well as build-up in currency in circulation is also taking place. The private sector credit expanded by Rs291.5 billion between July 1, 2004 and February 12, 2005 and currency in circulation swelled by Rs114.8 billion during this period.
In the comparable period of the last fiscal year, private sector credit had increased by Rs221.2 billion and currency in circulation by Rs111 billion. This also suggests that the central bank will have to keep increasing interest rates to check growth in the overall money supply, so far within the revised limits, and contain soaring inflation.
That simply means further increase in the yields on treasury bills including those of six months tenure that serve as benchmark for fixing export refinance rate. Thus, export financing is set to become costlier in the remaining part of the current fiscal year. And that is going to hurt exporters.
Pakistan's exports totalled $7 billion in the first half of this fiscal year against the full year target of $13.7 billion. Leaders of business community have been demanding for some time that the central bank should de-link the export refinance rate from the weighted average yield on six-month bills. (The two were linked on the insistence of the IMF to make interest rates market-driven.)
Chairman of SITE Association Dr Mirza Ikhtiar Baig reiterated this demand in a statement on Tuesday. He said costlier export financing is hurting exports growth and sought intervention of the State Bank Governor Dr Ishrat Husain in this matter.
The exporters are in problem not only because of costlier export finance that forms only a tiny part of their overall borrowing from the banking system but also because of overall increase in interest rates. (Out of Rs291.4 billion worth of private sector credit offered between July 1, 2004-February 12, 2005, only Rs18.13 billion were given under export finance scheme).
Overall interest rates have also been on the rise since the beginning of this fiscal year. Weighted average lending rate of all the banks combined rose to 6.87 per cent at the end of January 2005 from 6.49 per cent at end-June 2004, showing an increase of 38bps in seven months of the current fiscal year.
Dear visitor, the comments section is undergoing an overhaul and will return soon.