Businessmen call for 100bps cut in discount rate

KARACHI: Industry leaders on Friday demanded of the State Bank of Pakistan (SBP) to bring the discount rate down at least 100 basis points to 8.5 percent in the upcoming monetary policy to spur the economic activities.
The reduction in interest rates cuts cost of production, strengthens debt repayment ability and improves the credit worthiness. This encourages businessmen to make investment in the productive activities, increasing the wealth of the nation.
“Lower interest rate triggers borrowing and investments,” said Muhammad Adrees, president of the Federation of Pakistan Chambers of Commerce and Industry. “Increased government borrowing from the banking system is crowding out the private sector.”
Iftikhar Ahmed Vohra, president of the Karachi Chamber of Commerce and Industry, called for 200bps reduction in the policy rate to 7.5 percent keeping in view the average annual inflation rate of 6.08 percent for July through December 2014.
“This cut will imply the real interest rate of 1.4 percent,” he said. “It (SBP) should also take cue from the Reserve Bank of India, which reduced its benchmark rate by 25 bps to 7.75 percent amid an average inflation of 6.18 percent for the six months,” he added. Vohra said the reduction in the interest rate will encourage the businessman to seek financing from banks/creditors for spending on plant expansion and technology enhancement, which in turn will lead to efficient production and competitive exports.
“Such initiatives also result in job creation, leading to increased employment opportunities. Such financing helps businessmen enhance their working capital and better manage their inventory,” he said. Many industrialists believe the decrease in borrowing costs coupled with the decline in energy price may raise the exports by 15 to 20 percent in times to come.
An industry executive said lower interest rate stimulates consumer financing (for consumer durables like automobiles and electronic goods) and credit spending (credit cards).
“This creates demand for such goods, resulting in higher production by the manufacturers,” he said.
Economists and bankers, however, argue interest rates should be kept at a level that promotes savings and discourages excessive use of capital in the production process.
“Lowering of nominal rates will serve business interests, but without a wholesale reform of the fiscal and monetary policies and correct interest rates for efficient use of national resources the country will continue to suffer from a widening deficit between the required rate of investment to achieve a higher rate of economic growth and the rate of domestic savings,” said Dr Muhammad Yaqub, former governor SBP. He said: “The present framework of monetary and fiscal policies has resulted in lowering of the domestic rate of savings.”
He added that excessive use of bank borrowing by the government led to excessive rate of inflation, reduced the supply of credit to the private sector and increased the nominal lending rates, reflecting high inflation, attractive return offered by the government and high interest rate spread.