01-06-2010, 04:04 AM
Hi Furkhunda,
Although Toronto Boy has elaborated the issue in much detail with a banking and economic point of view but for the sake of general reader, I would like to add my comment here. In fact Finance rate are part of monetary policy of the govt. through which the govt. controls economic activities of the country. This policy has direct effect on the economic growth in the country. In countries other than Pakistan, Monetary policy is conducted independently by the central bank, thus creates a check and balance on Ministry of Finance. Although SBP is an autonomous body in Pakistan, but it is weird that it conducts its own monetary policy. However, SBP is playing a backbone role in Pakistanâs economy.
The prime objective of the export refinance is to stimulate economic activities of the country through creating easy and economic access to finance to empower companies financially, which are engaged in the export business. Let suppose, a company has Rs.100.00 which it has spent on producing goods and exported them to another country. Now, they have no money to make more goods, and export them. They will have to wait for money to come in, to pay of its creditors, labour etc so that he could buy more raw materials. This is called cash cycle gap. The govt. fills that gap through Export Refinance.
The exports bring foreign exchange to the country and make govt. to pay off its import bills. Thus stabilize the foreign exchange rate of its currency. A wide trade deficit weakens the currency of the country. This is the reason, govt. give some incentive to the exporters and provides financing at a cheaper rate to make them competitive in the international market. On the other hand, these re-finances help economy running and growing internally.
The SBP ensures that the exports bring their foreign exchange back into the country. So it compels the bank to recover the money from the exporters if the proceeds do not come into the country as per LC agreement. Also note that the bank of importerâs country also furnishes a guarantee for the return of the proceeds.
The multiplier effects of this incentive are very complex so I am leaving this discussion here.
Although Toronto Boy has elaborated the issue in much detail with a banking and economic point of view but for the sake of general reader, I would like to add my comment here. In fact Finance rate are part of monetary policy of the govt. through which the govt. controls economic activities of the country. This policy has direct effect on the economic growth in the country. In countries other than Pakistan, Monetary policy is conducted independently by the central bank, thus creates a check and balance on Ministry of Finance. Although SBP is an autonomous body in Pakistan, but it is weird that it conducts its own monetary policy. However, SBP is playing a backbone role in Pakistanâs economy.
The prime objective of the export refinance is to stimulate economic activities of the country through creating easy and economic access to finance to empower companies financially, which are engaged in the export business. Let suppose, a company has Rs.100.00 which it has spent on producing goods and exported them to another country. Now, they have no money to make more goods, and export them. They will have to wait for money to come in, to pay of its creditors, labour etc so that he could buy more raw materials. This is called cash cycle gap. The govt. fills that gap through Export Refinance.
The exports bring foreign exchange to the country and make govt. to pay off its import bills. Thus stabilize the foreign exchange rate of its currency. A wide trade deficit weakens the currency of the country. This is the reason, govt. give some incentive to the exporters and provides financing at a cheaper rate to make them competitive in the international market. On the other hand, these re-finances help economy running and growing internally.
The SBP ensures that the exports bring their foreign exchange back into the country. So it compels the bank to recover the money from the exporters if the proceeds do not come into the country as per LC agreement. Also note that the bank of importerâs country also furnishes a guarantee for the return of the proceeds.
The multiplier effects of this incentive are very complex so I am leaving this discussion here.
