Situationer: Did TERF benefit only the rich?

On Thursday, the National Assembly’s Standing Committee on Finance was told that $3 billion was given out as interest-free loans in the last government’s tenure, which was essentially the Temporary Economic Refinance Facility. The committee has now asked the SBP for the list of the 600 people who got these loans.

TERF was launched during the worst days of the pandemic amidst economic lockdowns that stretched months, with no vaccine in sight. In the context of a largely uncertain future, policymakers across the world relied on both conventional, and unconventional tools to sustain, or even catalyze economic growth. TERF was born in the same environment of uncertainty, and was launched to catalyze growth in fixed investment, such that it can support jobs, and economic growth. To make it more palatable in the context of an uncertain economic environment, the scheme was highly subsidized, with the State Bank of Pakistan footing the bill of a potential interest rate subsidy.

The terms of the scheme were extraordinarily concessional. The State Bank provided liquidity (or the funds) for the scheme at a refinance rate of one per cent per annum, while commercial banks could charge a maximum of 5.0 per cent per annum on the loan. To keep things in context, at the prevailing interest rates of 21 per cent, whoever was lucky enough to get a slice of the pie at a maximum interest rate of 5.0 per cent, is getting themselves a sweet interest rate subsidy of a minimum of 16 per cent. The eligibility of this scheme was largely restricted to large industrial units, effectively restricting the benefit of the scheme to a few hundred industrialists, and capital owners. The intent may be to support jobs, but the actual benefit was to a few hundred capital owners who continue to be heavily subsidized through a concessional interest rate.

The scheme supported loans of around Rs435 billion, which is roughly $3 billion at the average exchange rate parity prevailing during the tenure of the scheme. It is also estimated that roughly 80 per cent of the loans were allocated towards textile & apparel manufacturing, a segment notorious for relying on one concession or another to support export growth. Assuming a debt and equity split of 70-30, it is safe to say that the scheme catalyzed investment of roughly $4.3 billion. Assuming an asset turnover of 1.5 times (largely in-line with textile average), it can be further extrapolated that the investment could have generated annual exports in excess of $6 billion on an annual basis once all projects were operational.

However, the world isn’t linear, and nothing in Pakistan goes according to plan. A surge of investment led to an increase in demand for imported machinery, which triggered demand for US dollars, eventually leading to a current account deficit, as the central bank continued with an expansionary monetary policy for too long. As liquidity risks materialized, it became increasingly difficult to import equipment, resulting in cost overruns, and delays in commercial operations. A concessional loan regime effectively acted as a stimulus and triggered industrial investment and potential growth in exports. However, the absence of a coherent industrial policy led to a scenario where all investment was concentrated in the textile segment, while concessions were strictly restricted to a few hundred industrialists.

Even though the scheme had the best interests of economic growth at heart, its impact on the population of the country, or the most vulnerable segments, was minimal at best. It potentially triggered a current account crisis, which was further exacerbated by bad policy decisions. The social impact of the scheme was narrow, and its impact on either jobs generated or even exports generated over the last three years is minimal at best. The scheme essentially provided access to concessional, and close to free capital to those who already had sufficient access and ownership of capital, at the cost of higher inflation, which essentially acts as a tax for the population at large.

Maybe the scheme would be able to generate incremental exports over the next few years, but its impact over the last three years has been detrimental, and distortionary at best, serving the interests of the rent-seeking elite, rather than the population at large.