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

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  • Shabbir, Safia
  • Iqbal, Javed
  • Hameed, Saima
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    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.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48250.

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    Date of creation: 20 Jun 2013
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    Handle: RePEc:pra:mprapa:48250

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    Keywords: Risk Premium; Interest rate differential; Subsidized lending;

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    1. Girma, Sourafel & Gong, Yundan & Görg, Holger & Yu, Zhihong, 2007. "Can Production Subsidies Foster Export Activity? Evidence from Chinese Firm Level Data," CEPR Discussion Papers 6052, C.E.P.R. Discussion Papers.
    2. M. Idrees Khawaja & Sajawal Khan, 2008. "Pass-through of Change in Policy Interest Rate to Market Rates," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 661-674.
    3. Abraham, Vinoj & Sasikumar, S.K., 2010. "Labour Cost and Export Behaviour of Firms in Indian Textile and Clothing Industry," MPRA Paper 22784, University Library of Munich, Germany.
    4. Zia, Bilal H., 2008. "Export incentives, financial constraints, and the (mis)allocation of credit: Micro-level evidence from subsidized export loans," Journal of Financial Economics, Elsevier, vol. 87(2), pages 498-527, February.
    5. Arslan, Ismail & van Wijnbergen, Sweder, 1993. "Export Incentives, Exchange Rate Policy and Export Growth in Turkey," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 128-33, February.
    6. Ali Choudhary & Amjad Ali & Shah Hussain & Vasco J Gabriel, 2012. "Bank Lending and Monetary Shocks: Evidence from a Developing Economy," Working Papers id:4771, eSocialSciences.
    7. Alexander Hoffmaister, 1992. "The Cost of Export Subsidies: Evidence from Costa Rica," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 148-174, March.
    8. Christian Helmers & Natalia Trofimenko, 2009. "Export Subsidies in a Heterogeneous Firms Framework," Kiel Working Papers 1476, Kiel Institute for the World Economy.
    9. Adina Popescu & Alina Carare, 2011. "Monetary Policy and Risk-Premium Shocks in Hungary," IMF Working Papers 11/259, International Monetary Fund.
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