SBP has Increased Export Refinancing Rates

In line with the conditions mentioned in Letter of Intent (LOI) issued to IMF by the Government of Pakistan in December 2009, the State Bank of Pakistan has revised mark-up rates for Export Finance Scheme (EFS) and Long Term Finance Facility (LTFF). According to the circular, mark-up rates for EFS have gone up by 50 basis points (bps) to 8% and for LTFF up to 110 bps. Detail of the mark-up revision is shown in the table below:

-----------------------------------------------------Current------ Previous------ Change – bps

EFS -------------------------------------------------8.00%------- 7.50% -----------50

LTFF- up to 3 years ------------------------------10.30% -------9.20% ----------110

LTFF- Over 3 years & up to 5 years----------10.40% -------9.70% ------------70

LTFF- Over 5 years & up to 10 years --------10.50% ------10.25% -----------25

What LOI says with regard to refinancing schemes?

Following in the excerpt of Letter of Intent (LOI) issued to IMF:

The SBP will rationalize its refinancing schemes and eliminate the subsidies resulting from below-market interest rates. As a first step, the interest rate for the Export Financing Scheme (EFS) and the Long-Term Financing Facility (LTFF) has been increased on November 1 to 8 percent and 9.2–10.25 percent (depending on tenor), respectively. Further steps will be taken to bring the rate to the level of the benchmarks

of weighted average yield on six-month T-bills and yields of the same tenor for Pakistani Investment Bonds, respectively. We will continue with gradual increases to reach levels two percentage points below the benchmarks by end-September 2010, and rates will equal their benchmarks by end-September 2011.

It appears that other increase of 100 bps – 150 bps in re-financing rate in September 2010 can not be ruled out as gap would still exist between refinancing rates and benchmark rates (mentioned above).

Implications

With no doubts in mind, profitability of export related companies is expected to hurt badly as most of them are dependent on bank borrowing for the working capital and capex needs. This is also expected to have a negative impact on the banking sector in the shape of higher non-performing loans as increase in financing cost would damage the debt servicing capability of export related companies. Since, export related textile and cement companies have financed their working capital and capex requirements through above mentioned re-finance scheme. We believe increase in rates would have a negative impact on their bottom-lines.

Source: Arif Habib Limited