The State Bank’s monetary policy statement on Friday took most observers by surprise who had been predicting a cut of just 50 basis points. And shortly after the SBP governor’s speech, many economists and commentators were up in arms about a policy they said was completely out of sync with the economic times [see box].

Their core argument is that the structural flaws of the economy cannot be fixed by anti-cyclical measures such as interest rate cuts.

Interestingly, even trade and industry circles are not seduced by the prospect of cheaper money. “The central bank knows very well that government is the main borrower in the banking system, which creates inflation” said the group leader for APTMA Ejaz Gohar, who owns a large spinning mill himself. “It’s the high interest that the government has to pay on over Rs 1.2 trillion it has borrowed from the banking system that fuels inflation. The government is currently paying over Rs 900 billion on internal debt servicing and a reduction of 150 basis points will ease the interest burden of the government by Rs125-150 billion.”

However, to persuade Gohar and his cronies to invest, the State Bank will have to do more. “The minimum that we were expecting was a reduction of 400 basis points,” says Gohar. “That would have reduced the debt servicing burden of the government by Rs300-350 billion and reduced its need to borrow more. And the private sector would have had more space to borrow.”

The former chairman of the All Pakistan Contractors Association Akbar Shaikh echoes Gohar. “The construction sector had been demanding a higher cut in interest rates,” he says. “Ideally, mortgage rates should be in the range of seven to nine percent. At the current policy rates, the loans to house builders will be double this.”

While the chairman of Guard Group of Companies Iftikhar Ali Malik thinks the cut to 10.5 percent is a welcome move, he insists that interest rates have to be in the single digit if the central bank is interested in job creation. “The central bank unnecessarily put the rates on hold for a long time, which resulted in the closure of many manufacturing facilities,” he says. According to Malik, these industries will need special packages for revival.

“India, for instance, has allowed moratoriums on interest payments to certain industrial sectors that were under stress. Their loans have been restructured on a long-term basis he added. And the government of Pakistan will have to do the same soon, if it wants its industries to survive.”

Meanwhile, PAAPAM chairman Nabeel Hashmi is complaining about how inflation has increased the cost of doing business. “As a result, industries are operating at 40 to 60 percent capacities. While we’re finally seeing a reprieve from the past stubbornness of the central bank, policy makers will have to come out with a special package to spur growth.”