Karachi September 2 2022: Under the new approved law of SBP, central bank is legally bound to phase out refinancing facilities in next five year.
As of end-June 2022, the outstanding amount for all facilities was PRs 1,607 billion, or 17.4 percent of private sector credit.
Although government assessment of the Export Refinancing Scheme (EFS) in February 2022 found that this program boosts exports, government recognize that aligning refinancing rates closer to market rates should lift the efficiency of the use of these funds and help to allocate credit in a fairer, more transparent manner as beneficiary firms are generally large, well established, and concentrated in a few sectors, which already dominate access to private sector credit.
In addition, raising refinancing rates reduces the subsidy requirement for operating the schemes outside of SBP’s balance sheet (see below). To this end, we have reduced the gap between the policy rate and the interest rate on the LTFF/EFS facilities to 5 percentage points.
Ministry of Finance see that a clear dividing line between SBP operations and the refinancing schemes is imperative on governance grounds, allowing SBP to focus on its core objectives. Such a structural change will allow support to the export sector transparently through an on-budget subsidy.
In this regard, the Ministry of Finance and SBP have advanced work on an initial plan in consultation with other stakeholders to establish an appropriate Development Finance Institution to support the eventual phasing out of the refinance facilities (end-April 2022 SB, reset to end-December 2022). The plan, which was approved by the Acting Governor on May 17, 2022; and remains a live document which will be refined with assistance of the IMF, foresees the transfer of the LTFF/EFS facilities to Ex-Im Bank under the following parameters: (1) a transition period of no more than 5 years; (2) no implicit subsidization of Ex-Im Bank through the SBP; and (3) expeditious resolution of operational constraints at Ex-Im Bank.
To support this initial planning work, MoF created a working group in March 2022 with representatives from the Ministry of Finance, Ministry of Commerce, Securities and Exchange Commission (SECP), SBP, and Ex-Im Bank. While working towards the phasing out of the existing refinancing facilities, in line with a transitional plan agreed with the IMF, the SBP is committed not to introduce further schemes.