Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan

Shabbir, Safia and Iqbal, Javed and Hameed, Saima (2013): Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan.

Abstract

Episodes of monetary contraction increases the risk premium of the enterprises which results in higher effective interest rate differential between market loans and subsidized loan; making these firms more reliant on subsidized loans. Since subsidies are easier to exploit and hard to administer. This study evaluates the subsidized lending schemes of Pakistan using information on risk premium and effective interest rate differential of 174 exporting corporate firms over thirteen years (1999-2011). Our results shows that export finance schemes (EFS) helped promoting exports, while long term financing facility (LTFF) facilitated fixed capital formation of these corporate firms. Additionally, using matched sample with loan level data from eCIB, we found that during the phases of high interest rate differential enterprises substituted their short term market loans with subsidized loans (export finance); while no such substitution is observed between long term loans and LTFF.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk Premium, Interest rate differential, Subsidized lending
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General

References

Alexander Hoffmaister (1992), “The cost of Export Subsidies; Evidence from Costa Rica” IMF Staff Papers Vol. 39 No. 1 (March 1992).

Alina Carare and Adina Popescu (2011), “Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR” IMF Working Paper WP/11/259.

Andrew Bernard Joachim Wagner (1996), “Exports and Success in German Manufacturing” working paper department of economics, Massachusetts institute of technology

Arsalan, I., Van Wijnbergen, S., (1993), “Export Incentives, Exchange Rate Policy and Export Growth in Turkey ” Review of Economics and Statistics. Vol. 75, No.1 128-133.

Arvind Panagariya (2000), “Evaluatintgh e Case for Export Subsidies” The World Bank, Policy Research Working Paper 2276

Bagwell, Kyle and Robert Staiger (1989) “The Role of Export Subsidies When Product Quality Cycles,” Quarterly Journal of Economics, 108, 77-114.

Bilal H. Zia (2008) “Export incentives, financial constraints, and the (mis)allocation of credit: Micro-level evidence from subsidized export loans, Journal of Financial Economics 87 (2008) 498–527

Choudhary, Ali., Amjad Ali, Shah Hussain and Vasco J. Gabriel. (2012). “Bank Lending and Monetary Shocks: Evidence from a Developing Economy”, SBP working paper Series, WP 45.

Fryges, Helmut and Joachim Wagner (2008), Exports and Productivity Growth – First Evidence from a Continuous Treatment Approach. Review of World Economics / Weltwirtschaftliches.

Girma, et all. (2009), Subsidies and Exports in Germany, First Evidence from Enterpris Panel Data” University of Luneburg, Working Paper Series in Economics No. 117.

Girma, Surafel, Yundan Gong, Holger Görg and Zhihong Yu (2007), Can Production Subsidies Foster Export Activity? Evidence from Chinese Firm Level Data. CEPR Discussion Paper 6052

Görg, Holger, Michael Henry and Eric Strobl (2008), Grant support and exporting activity. Review of Economics and Statistics 90(1), 168-174.

Helmers and Natalia (2012), “The Use and Abuse of Export Subsidies: Evidence from Colombia” Review of Economic Studies, Vol. 58, pp. 277-297.

Helmers, Christian and Natalia Trofimenko (2009). Export Subsidies in a Heterogeneous Firms Framework. Kiel Working Paper, 1476, Kiel Institute for the World Economy, Kiel Industry Reallocations,” Econometrica, Vol. 71, 1695-1725.

Jung and Lee (1986), “The Effectiveness of Export Promotion Policies: The Case of Korea” Weltwirtschaftliches Archiv, Bd. 122, H. 2 (1986), pp. 340-357

M. Idrees Khawaja And Sajawal Khan (2008), “Pass-through of Change in Policy Interest Rate to Market Rates” The Pakistan Development Review 47 : 4 Part II (Winter 2008) pp. 661-674

M.A Kemal and Nadeem ul Haq (2007) “Impact of Export Subsidies on Pakistan’s Exports” PIDE Working Papers 2007:26

Robert G. Bowman (1999), “Market Risk Premium and Interest Rates” Department of Accounting and Finance, University of Auckland.

Provision in an Emerging Financial Market,” Working Paper, University of Chicago GSB.Research Working Paper No. 2276.

Richard S. Eckaus (2004), “China’s Exports, subsidies to State Owned Enterprises and the WTO” MIT, Departemnt of Economics, Working Paper Series 04-35 (2004).

Shabbir, Safia. (2012). “Balance Sheet Channel of Monetary Transmission in Pakistan: An Empirical Investigation”, SBP Research Bulletin, Vol 8, No1, 2012

Shabbir, Safia. (2013). “Implications of Monetary Policy for Corporate Sector and Economic Growth in Pakistan”, SBP working paper series No. 61

Vinoj Abraham and S.K. Sasikumar (2010) “Labour Cost and Export Behaviour of Firms in Indian Textile and Clothing Industry” MPRA Paper No. 22784

World Bank (1993) “The East Asian Miracle: Economic Growth and Public Policy,” Oxford University Press for the World Bank, Washington, DC.

Yulei Peng and Anastasia S. Zervou (2012), “Monetary Policy and the Risk Premium” Journal of Political Economy 98 (3), 519-543.