INTEREST RATES AND ITS IMPACT ON THE
EXPORTS OF READYMADE GARMENTS IN
PAKISTAN: A STUDY FROM 2000 TO 2010.
ATIF SALMAN
DR. MUSTAGHISUR REHMAN
INTRODUCTION
• Readymade Garments or Apparels are the final
product of textile sector which is backbone of exports
in Pakistan.
• Passing through different stages of value addition e.g.
ginning, spinning, weaving, dying, printing and
stitching, cotton and other raw materials are
transformed into readymade garments.
• Pakistan’s textile sector, though biggest foreign
exchange contributor; garment export growth has
remained stagnant for quite a long time now because
of growing competition this sector now faces from
Bangladesh, Sri Lanka, India and China
INTRODUCTION
• Interest Rate is the main factor that directly effects
the cost of funds of exporters.
• The State Bank of Pakistan SBP introduced Export
Refinance Scheme ERF in 1973 with the intention to
bring down borrowing costs for exporters.
• Not only that ERF provide funds at subsidized rate,
but also matches exporter’s cash flow needs.
• An exports that increase by 17.5% would actually
translates in a 1% increase in GDP
RESEARCH PROBLEM
• Country’s interest rate is one of the main cost factors in
the production of readymade garments.
• Government of Pakistan has taken various initiatives to
increase the volume of exports of garments. Offering
subsidized interest rate for the growth and development of
the garment industry is one of those initiatives in last ten
years.
• The question “How far the interest rates in Pakistan have
been an influencing factor for the growth of the garments’
exports here from the year 2000 to 2010?” is important to
investigate
OBJECTIVES OF THE STUDY
To find the effects on the volume of textile garment’s
export due to the interest rates that prevailed in
Pakistan in last decade 2000 to 2010.
BENEFIT OF THE STUDY
• This study identified the problem faced by garment
exporters with special focus on interest rate.
• This study can be of help to State Bank of Pakistan in
designing monetary policy especially in fixing
interest rates on Export Refinance Scheme
• It is beneficial for the exporters to understand the
interest rate as a cost driver.
LIMITATIONS OF THE RESEARCH
• Time constraint: For this research the allowed time is
about three months which was a constraining factor.
• One factor analysis: This research is limited to the one
factor (interest rate) responsible for the export increase
and decrease, while other factors, such as subsidies, fiscal
deficit, devaluation, availability of utilities etc have not
been included into the focus of this research.
LITERATURE REVIEW
• For any business, Interest Rate IR cost is the main
input in business. In an economy, IR directly impacts
inflation, exchange rate & cost of other inputs for
garment exports.
• According to Quddus & Saeed (2005), Export-led
growth increase efficiency in the economy and allows
a better utilization of resources.
• Export oriented policies guide optimal resource
allocations in the economy & generate technological
enhancement in response to exposure to international
competition (El-Sakka & Al-Mutairi, 2000).
LITERATURE REVIEW
• Increase/decrease in IR affects not only investments but
exports in a very dramatic manner. IR influences inflation
affecting the cost of input for exports and investments.
• Increase/decrease in IR strongly impacts exchange rate
that in turn effect exports positively or negatively.
• Devaluation and Revaluation has a very strong impact on
exports, imports, foreign remittances & balance of trade
of an economy
• Interest rate has shown a lot of variation in the last 10
years under study.
LITERATURE REVIEW
• Export Refinance Rate varied from as low as 3% to 12%.
• Market (Kibor + Spread) rate also hovered around
between 6 % to 17% (SBP-Handbook of Statistics on
Pakistan Economy).
• Haque & Kemal (2007) found that ERF and
rebate/refund have insignificant impact on exports in
long run.
• A study by Mahmood and Azhar (2001) that
subsidized credit facility and other subsidies to
garment exporters resulted in inefficiencies.
• Pakistan lies along with few countries where borrowers
face the highest interest rate in the world (Sabir 2011).
RESEARCH METHODOLOGY
• This research is interpretative in nature and of time series
types based on the existing stats.
• This is based on the secondary data i.e existing statistics.
• The data was collected from the publications of the State
Bank of Pakistan, Economic Survey of Pakistan, database of
Ministry of Textile Industry, database of Trade
Development Authority of Pakistan TDAP, Federal Bureau
of Statistics, Ministry of Commerce, Federal Board of
Revenue etc
DATA COLLECTION & PRESENTATION
• For the literature review the research papers,
published reports by various institutions and studies
available on the subject on internet, journals and
SZABIST library have also been consulted.
• The collected secondary data has been analyzed with
Time-Series technique.
• We collected monthly data of readymade garments
exports from 2000 to 2010 from SBP.
DATA COLLECTION AND PRESENTATION
Descriptive Data Analysis
• We plot the value of readymade garments exports
over time in the following chart. The chart shows that
a readymade garments export has a great deal of
variation over the time period under study.
Exports of Readymade Garments over Time
Pak Rs Bn
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Exports
35.90
43.69
48.10
50.77
45.51
66.17
68.44
72.14
84.92
82.53
103.55
Source: SBP
PAKISTAN EFS RATES FROM 2000 TO 2010
Year
RATES
2000
8
2001
11
2002
8
2003
4
2004
5
2005
9
2006
8
2007
8
2008
8
2009
8
2010
10
TIME-SERIES DATA ANALYSIS
• The research used dynamic correlations to investigate
relationship between exports of Garments and EFS
Interest Rates.
• Dynamic Correlation means computing correlation of
some variable with different lag of some other
variable.
• Since exporters need time to prepare merchandize
after getting loans of EFS, we investigate relationship
between lags of EFS and readymade garment exports.
TIME-SERIES DATA ANALYSIS
• Owing to generally associated issues of seasonality
with monthly data, first of all we seasonally adjusted
the series of garment exports using X12 algorithm
through Eviews.
• After seasonal adjustment, we obtain correlation
matrix between garment exports, current EFS and its
lags.
• We construct correlation matrix till 12th lag of EFS
rate.
EFS(-12)
EFS(-11)
EFS(-10)
EFS(-9)
EFS(-8)
EFS(-7)
EFS(-6)
EFS(-5)
EFS(-4)
EFS(-3)
EFS(-2)
EFS(-1)
EFS
Correlation between RGX and lags of EFS
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35
-0.4
KEY FINDINGS
• The table in previous slides clearly depicts that there
is negative correlation between lags of EFS rate and
readymade garments exports.
• Not only the correlation is negative; its magnitude
decreases (i.e. gets closer to -1), or negative
correlation increases, as correlation with older lags is
calculated.
KEY FINDINGS
• Dynamic correlation analysis reveals that readymade
garments exports generally move in opposite
directions of EFS rate.
• The lags show that interest rate and readymade
garments exports are negatively correlated and in
order to boost their export the interest rate is needed
to be lowered.
• However, since the values of correlation are on the
lower side, i.e. even less than 0.5 (more than -0.5 in
this case), there are other reasons which impact the
exports of readymade garments even more.
KEY FINDINGS
• The positive finding is that by the end of the twelfth
month the correlation becomes threefold.
• This shows that the impact of interest rate comes
much later.
• The policy of maintaining interest rate at a lower rate
has some positive effect on garments exports.
KEY FINDINGS
• This shows that EFS helps RGX boost but not as
much as we expected.
• If there would have been related better then the
correlation values have been, at least, higher than 0.5
(lower than -0.5 in our case).
• So in the case of Pakistan, EFS only impacts RGX in
a limited way.
CONCLUSION
• Our results have proved that there is a negative
relationship between increase in interest rates and
exports.
• An increase in interest rate has negatively impacted
garments exports of Pakistan from year 2000 to 2010.
RECOMMENDATIONS
• In order to promote exports of readymade garments,
SBP should maintain EFS rate at low and stable
level.
• The Export Finance Scheme should be continued as
there are rumors that the central bank may withdraw
the scheme again.
• The difference between EFS interest rate and KIBOR
plus, charged on regular financing, is hardly 3
percent.
RECOMMENDATIONS
• The credit scheme should be made easily accessible
to all large to small sized exporters.
• If the scheme is to be discontinued exporters other
problems should be solved.
RECOMMENDATIONS
• Government should provide electricity and other
utilities at competitive rates and ensure
continuous availability of these utilities to their
industrial sector at competitive rates.
• Government should control its fiscal deficit and
spend money judiciously on development projects
so that the exporters can reap true benefits of the
infrastructure available in the country.
FUTURE AREAS OF RESEARCH
• Future areas would be to have a multivariate
regression analysis including the other factors
affecting the garment export.
• I would like to further explore how these other
variables impact garment exports.
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