State Bank of Pakistan (SBP) governor, Jameel Ahmad, has told a senate committee that letters of credit (L/Cs) ensured that loans made under the concessionary Temporary Economic Refinance Facility (TERF) to some businesses during the Covid pandemic were not used for any purpose other than for purchasing plant and machinery.

The senate's standing committee on finance and revenue had raised questions over the transparency of over US$3 billion of loans approved under the TERF. Members suspected that some funds had been misdirected and expressed concerns over the central bank's weak oversight of the funds.

Senate questions

The committee last week questioned whether some of the loans had been redirected towards real estate investments or illegitimately transferred overseas rather than being used for their prescribed purpose of boosting exports by installing industrial machinery.

Ahmad said the financing under TERF was strictly for the procurement of plant and machinery, which could only be purchased under L/C terms.

The initiative required L/Cs for imported goods and inland (domestic) L/Cs for the purchase of plant and equipment manufactured in or already in use in Pakistan.

Central bank rules

The SBP stated that for the duration of the TERF, funds would be available for imported and locally manufactured plant and machinery to be used for setting-up of new projects or expanding existing ones in all sectors.

The SBP also allowed the TERF facility to be used in cases where L/Cs and inland L/Cs were opened prior to, but retiring after the introduction of the scheme on 17 March 2020.

The central bank also specifically stated that funding under the facility cannot be used for procurement of imported second-hand machinery, land or carrying out civil works.

SBP's role

The central bank governor pointed out to the committee that the SBP played no part in selecting the borrowers or disbursing the funds.

Ahmed explained that the total credit risk was undertaken by banks or development finance institutions, which he said had been directed to exercise due diligence in disbursing finance to borrowers.

Neither the SBP nor the government were providing risk coverage he concluded.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.