Karachi, December 30, 2022 (PPI-OT): SBP announces a 2% hike in EFS and LTFF rates

SBP has raised Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF) rates by 200bp to reduce the gap between these rates and policy rates. Mark-up rates for financing under EFS (Part-I and Part-II) and LTFF have now increased from the previous 11% to 13%.

The move is a continuation of the trend where on a cumulative basis, EFS rates have seen an increase of 10% vs an increase of 6.25% in Policy Rate since December 2021.

While the move is in line with IMF recommendation to reduce the interest rate subsidy offered on refinance schemes, it is likely to cause a dent in earnings of export-oriented companies, mainly textiles.

Monetary adjustment to the finance rates for exporters

SBP through a circular has decided to decrease the difference between the policy rate and Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF) rates from the previous 5 percent to 3 percent. As a result of which mark-up rates for financing under EFS (Part-I and Part-II) and LTFF will now increase from the previous 11% to 13% per annum.

The mark-up rates for EFS and LTFF will be automatically updated going forward with any change in the SBP policy rate maintaining the difference between the policy rate and EFS and LTFF rates at 3 percent. To recall, SBP in its Monetary policy meeting in July had decided to link the interest rates of export incentive schemes, including EFS and LTFF loans with the policy rate before which it was a fixed rate.

Continuing the trend of reducing interest rate subsidies

The move comes within a month’s time after SBP Monetary Policy Committee increased interest rates by 100bp taking them to 16%. The move to increase rates on EFS and LTFF is a continuation of the trend that has been seen in recent time. On a cumulative basis, EFS rates have seen an increase of 10% vs an increase of 6.25% in Policy Rate since December 2021.

In line with IMF recommendation but EPS dent for exporters

The move is in line with IMF recommendation to reduce the interest rate subsidy offered on refinance schemes. The recommendation is based on the premise that reduction in such subsidies results in more effective transmission of monetary policy changes. IMF recommendations entail a gradual phase out of SBP from such scheme. The move hence bodes well from remaining on track with the IMF vis-a-vis agreed reforms.

On the flip side, the move will dent earnings of export-oriented companies although the new rates will be applicable only on fresh disbursements of loans under these policies.