The State Bank of Pakistan’s (SBPP) Temporary Economic Refinance Facility (TERF) will raise the investment-to-GDP ratio by almost one percent during the ongoing fiscal year despite the COVID-19 pandemic.
This is projected from the fact that the approvals of long-term concessionary investment loans under the scheme have already reached Rs. 430 billion, Dawn News reported.
The SBP had introduced the concessionary refinance scheme to facilitate investment in new industrial projects, replacement of old technology by the existing ones, and capacity expansion.
“The key purpose of TERF was that we didn’t want our businessmen to postpone their investment decisions during the pandemic. We wanted to provide them incentives to not postpone their [planned] investments,” said SBP Governor, Dr. Reza Baqir, in an interview with Dawn.
The long term financing is available to all sectors of the economy (except the power industry), at a fixed rate of 5 percent for 10 years, with a grace period of two years. It can be availed through banks and Development Finance Institutions (DFIs).
The loan limit under TERF has been fixed at Rs. 5 billion per project. The scheme is valid until the end of March 2021, which means that letters of credit (LCs) need to be established before March 31 to avail of this scheme.
Dr. Baqir pointed out that the scheme was well-targeted for investment as opposed to consumption. “Investment generates output for years to come; it means you get financing only if you open an LC (to make it hard to abuse the scheme).”
SBP Governor explained that the uncertainly caused by the pandemic made investors less eager to continue with their investment plans. That led the SBP to reduce the end-user rate from 7 percent to 5 percent, allowing TERF financing for capacity expansion and balancing, modernization, and replacement (BMR).
The additional incentives and economic recovery, seen after the lifting of the lockdowns, have also contributed to the success of the TERF scheme.
As per the central bank’s data, banks and DFI’s had received 20 times the requests by February 18, 2021, compared to the number of requests received by April-end 2020.
In monetary terms, this is a jump from Rs. 36 billion at the end of April to Rs. 742 billion by February 18. The loan amounts approved have also increased from Rs. 500 million to over Rs. 430 billion. Dr. Baqir said, “The borrowers have so far established LCs worth $1 billion and many payments have already been made.” The SBP data shows that at least Rs. 58 billion has so far been disbursed under TERF.
A breakdown of the approved loans indicates that 30 percent TERF financing has gone directly into new projects while the remaining amount is being used for expansion/BMR through new investment.
The textile industry is the largest borrower of the scheme, with nearly 50 percent share in the overall approved financing, with FMCG (Fast Moving Consumer Goods) sector and auto sector following it with 11 percent each.
The central bank has also received several requests for extension in the deadline for the TERF scheme. However, the SBP Governor said, “When we introduced this scheme we made it clear that it will be available for one year. This meant that LCs have to be opened by the end-March. The whole purpose was to not delay investment and that is why we came with a deadline.”