SBP phases out export finance scheme to meet IMF terms

KARACHI: The State Bank of Pakistan (SBP) has begun to phase out its export finance scheme, a concessionary loan program for exporters, to comply with one of the key conditions of the International Monetary Fund (IMF) loan program, The News learnt on Monday.

The central bank said in the letter to banks that as part of the gradual phasing out of the Export Finance Scheme (EFS) to a new arrangement over a period of time, the banks' revolving refinance limit under conventional and Islamic EFS will be reduced.

Under the new arrangement, commercial banks may be able to take up the phased-out portion through their own liquidity against the government subsidy. However, this mechanism will only become effective and the subsidy to be provided by the government will be available through the Export Import (EXIM) Bank once operational payment modalities are agreed upon by the stakeholders.

According to analysts, the SBP will gradually stop offering concessional loan schemes and route them through the EXIM Bank with government assistance. Meanwhile, the SBP is restricting the limits and has raised the rates substantially by linking these schemes with a policy rate minus 3 percent, versus a flat 3-5 percent earlier.

The IMF's board approved a $3 billion, 9-month Stand-By Arrangement for Pakistan to help stabilise the country's ailing economy. The deal, a lifeline for the country which has been on the verge of default, came with a number of tough fiscal and monetary conditions.

As this is a type of subsidy that violates the terms of the IMF loan requirement, the SBP is reducing the limits for banks under the EFS. The SBP offers banks funds at discounted rates, and the banks then refinance the money to exporters.

"The government is working to replace the scheme through the launch of similar products through EXIM Bank. Under the new scheme, banks are likely to utilize their own funds and claim subsidies,” said a senior banker. “Some exporters are alleged to be exploiting the EFS because they borrow money, park it at banks, and collect interest on it rather than using it for exports,"

The IMF believes that the SBP's refinancing schemes lead to distortions. The global lender wants these initiatives to be implemented or carried out by a separate institution rather than by the government using the SBP, the banker said. “Development finance institutions need to be established by the government to carry out subsidized financing schemes that would promote transparency and prevent market distortions.”