Monday June 24, 2024

Industry views rate cut as ‘insufficient’

By Tanveer Malik
June 11, 2024

The State Bank of Pakistan building in Karachi. — APP/file
The State Bank of Pakistan building in Karachi. — APP/file

KARACHI: The business community on Monday termed the State Bank of Pakistan’s rate cut “too low” to make any positive impact and suggested a reduction of 10-12 per cent.

However, the community believed that the reduction set the direction that it would come down further if economic indicators kept improving. Pakistan’s central bank on Monday decided to reduce the policy rate by 150 bps to 20.5 per cent considering a significant decline in inflation.

According to Reuters, the Pakistan Business Council (PBC) believes that “with headline inflation decelerating by 550 bps from April to 11.8 per cent in May, and the policy rate significantly positive, businesses generally expected a sharper cut.”

“However, as the monetary policy committee points out, upward inflationary risks emanate from the FY25 budget and future increases in energy tariffs. So the ball is in the government’s court to manage inflation.”

Per the PBC: “Businesses should derive comfort from the narrowing current account deficit, a primary surplus on the fiscal account, deceleration in the growth of currency in circulation, declining food inflation, and stable FX reserves... All these factors augur well for further reduction in the policy rate.”

In a press release, President of the Federation of Pakistan Chambers of Commerce & Industry (FPCCI) Atif Ikram Sheikh said that the cut is “too little, too late, since the business, industrial and trade communities expected an even higher and more substantive rate cut.”

The FPCCI president added that “the interest rate should come down to 15 per cent to enable Pakistani exporters to compete in regional and international export markets through reducing the cost of capital. This step should be accompanied with the government honouring its promise of rationalize the electricity tariff for the industry.”

Sheikh maintained that consumer prices were categorically showing a declining trend as they fell by 3.2 per cent in May 2024 compared to a decrease of 0.4 per cent in April 2024 as per the Pakistan Bureau of Statistics (PBS). “It is now overdue to provide respite to the business community in their access to finance from commercial banks through effectively and appropriately cutting the key policy rate,” he added.

In his comment to The News, Chief Executive of the Trade Development Authority of Pakistan (TDA) Zubair Motiwala, who is also chairperson of the Businessmen Group, says that while the business community welcomes this reduction, “it thinks the reduction in the policy rate is little.”

“The policy rate should have been reduced by 10-12 per cent now that inflation has fallen to close to 12 per cent”. Motiwala shares that “in the past when inflation was at 12 per cent, the policy rate was at 9.7 percent.”

Per Motiwala: “[the rate cut] is a welcome sign as it shows that a direction has been set and that policy rate needs to be brought down after the inflation rate reduces in the country.”

Regarding the impact of the rate cute, he believes that it “is likely to encourage the business community, which has put on hold its investment for expansion in their industry for a long time to reconsider.”

President of the Karachi Chamber of Commerce & Industry (KCCI) Iftikhar Ahmed Sheikh says, “keeping in view the descending inflationary trends, the business community was expecting a substantial reduction of at least 4-5 per cent but a meagre reduction of 1.5 per cent was announced, which was a bit disappointing.”He says: “However, as the SBP has decided to ease the monetary policy by 150 basis points, we hope that this approach continues in the days to come to gradually bring down the interest rate to a single digit”, adding that the lower interest rate in line with the international trends will certainly encourage borrowings by the private sector that will prove favourable for the economy by encouraging business expansion as well as industrialization.

He is of the view that although inflation has drastically come down to slightly above 11 per cent, after touching 38 per cent, the ease in inflation is not because of the SBP’s tight monetary policy stance. “It can purely be attributed to the administrative measures taken by the government along with improved agricultural production as well as a reduction in petroleum price.”

President of the Korangi Association of Trade and Industry (KATI) Johar Qandhari has warmly welcomed the SBP’s decision to reduce the interest rate by 1.5 per cent. Qandhari says that “the business community had long advocated for a reduction in the interest rate, which had been among the highest in the region. This high rate contributed to inflation and created capital shortages for industrialists, making it difficult for businesses to secure affordable loans.”

Qandhari points out that the inflation rate has significantly decreased from 33 to 11 per cent, creating an opportunity for a more substantial reduction in the interest rate. While he appreciates the 1.5 per cent cut, he emphasizes that it is insufficient. He urges the SBP to “bring the policy rate to a single digit to promote industrialization, which, in turn, will boost job creation.”