My data formatting for the discount rate comes in handy for looking at textile sector. Reportedly we have broken export records in Dec'20. Analyzing SBP data will enable us to design better incentives in future.

A short thread based on 13 and 14 classifications of SBP report

All the graphs are "net borrowing compared to last month".

The export refinanced (ERF) trend changed in April 2020 with the ERF loans getting repaid. The trend reversed in Sep 2020. Borrowing has increased but new borrowing isn't as large as the earlier periods.

The sector's borrowing against the subsidized TERF/LTFF facilities increased. This will translate into additional capacity down the road. This may explain rising imports (if machinery imported) but do not explain rising exports. The market rate long term loans were paid down.

The working capital (WC) loans are required to procure cotton, dyes, chemicals, pay salaries etc and the need for WC loans increase when there is major growth. Change in WC loans is mostly negative or slightly positive in the last 6 months.

Not all borrowers classified by SBP under textile and apparel would be in the export business. Exporters prefer to take export refinance as it is cheap at 3% so the borrowers borrowing market rate WC loans are most likely suppliers to the local market (incl exporters).

If these Borrowers are suppliers to exporters i.e. yarn supplier or providing finishing services (e.g. dyeing plant) to exporters, this segment will be a leading indicator of exports.

SBP decomposes the working capital into small loans and others (I don't know the definition of 'small' and 'others'). There has been an increase in the small loans in Oct and Nov which was partially offset by decrease in 'others'

The suppliers to exporters may not be affected by discount rate as much as they are affected by orders from exporters. SBP can reduce the rate to 5% but if the "
exporter does not have export orders, it will not be placing an order with supplier of yarn or dyeing plant.

Now looking at working capital borrowing both subsidized (Export refinance (ERF)) and market rate in the same graph and same scale. Period from April to Sep (lockdowns?) shows debt pay downs. Later, ERF borrowing has increased but at lower levels than the earlier period.

Increase in small loans is significantly higher than earlier periods. There can be two reasons for this. Either the suppliers are ramping up production for local consumption or two they supplied higher orders to exporters on credit.

As payment terms in local market are usually 3 months, it may be reflected in higher ERF in Jan or February. But if we have already received record-breaking export proceeds, it could be that exporters are supplying against sight LCs.

The story could be: exporters received large number of orders against sight LCs. They placed orders with local market suppliers on credit terms. The reason for increase in WC loans in Oct/Nov. Once exporters received goods, they exported it and realized the LC payment in December

Two months is a pretty short time to realize i.e. local market suppliers started borrowing in Oct and proceeds already realized in December. But then stranger things have happened.

Alternate theory could be that record breaking export is due to exporters realizing the proceeds of all the orders that were cancelled suspended earlier. Exporters had already utilized working capital in Jan-Mar 2020 to produce the goods that were lying idle in their warehouses,

they didn't need to utilize more working capital. They exported the goods that were produced before the lockdowns were imposed.

SBP numbers alone won't tell the story. Someone will have to do the fieldwork to find out why exports increased to help us design better policies.

Finally, it appears that the discount rate, ERF or borrowing from commercial banks have no relationship with our exports (assuming record-breaking December exports). Other factors are responsible.