Textile exporters rue Pak SBP's policy rate cut by 75 bps

21 Mar '20

3 min read

Pic: Shutterstock

The State Bank of Pakistan (SBP) recently reduced its policy rate by 75 basis points to 12.50 per cent from 13.25 per cent along with two other steps to deal with the situation created by the COVID-19 pandemic. SBP governor Reza Baqir said with the domestic deceleration in food prices and a significant decline in consumer price expectations, the outlook for inflation had improved, paving the way for the rate cut.

Textile exporters and economists rejected the 75-basis points cut in policy rate. The All Pakistan Textile Mills Association (APTMA) Punjab chairman Adil Bashir said inventories have started building up due to cancellation and delays in shipments, and the export-oriented sector cannot bear such exorbitant interest rates. The meagre reduction in interest rates will lead to large-scale closures if inventories don’t move, he added.

SBP announced a Temporary Economic Refinance Facility (TERF) and its Shariah compliant version to stimulate new investment in manufacturing. Under this scheme, it will refinance banks to provide financing at a maximum end-user rate of 7 per cent for 10 years for setting up of new industrial units. The total size of the scheme is Rs 100 billion, with a maximum loan size per project of Rs 5 billion.

It could be accessed by all manufacturing industries, with the exception of the power sector, where an SBP refinance facility for renewable energy projects already existed, he said.

In line with the SBP’s other refinancing schemes, the credit risk would be borne by banks and the selection of projects to finance would also be determined by them. This scheme would help counter any possible delays in the setting up of new projects that investors were planning prior to the coronavirus outbreak. It would be available for one year only, requiring a letter of credit to be opened by end of March 2021.

Baqir said the third step was Refinance Facility for Combating COVID–19 (RFCC) and its Shariah compliant version to support hospitals and medical centres in combating the spread of COVID–19.

Under this scheme, SBP will refinance banks to provide financing at a maximum end-user rate of 3 per cent for five years for the purchase of equipment to detect, contain and treat the novel coronavirus. SBP would offer this facility to banks at zero per cent.

All hospitals and medical centres registered with federal or provincial health agencies and which were engaged in the control and eradication of COVID-19 would be eligible for this facility.

Baqir said the bank is ready to take more measures and increase financing facilities in case the situation worsens due to spread of COVID-19.

Economist Qais Aslam said it is high time to think about the declining investment climate in the country rather than the interests of the government and foreign portfolio investors.

He said the finance ministry should at the same time bring down the indirect tax rates and business taxes, gas and electricity as well as the prices of petroleum products for an overall cut in costs otherwise the monetary policy alone might not be enough to stimulate the economy.

Fibre2Fashion News Desk (DS)

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