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Thursday March 28, 2024

Economists, business community react sharply over interest rate hike

By Javed Mirza
March 30, 2019

KARACHI: Economists and business community on Friday reacted sharply over the 50bps interest rate hike announced by the State Bank of Pakistan, and termed it an anti-industrialization measure, which would only increase cost of doing business and discourage productive investment.

Senior Vice President FPCCI Dr. Mirza Ikhtiar Baig said, “It’s against industrialization and discourage new job creation. Industrialists and investors cannot afford to avail bank borrowing to establish new industries at 14-15 percent mark up rate. Moreover, the uncertainty around USD is also discouraging investment, as no one is ready to forward book USD at even Rs145.”

The central bank announced an increase of 50 basis points in its policy rate to 10.75% (almost 7-year high), taking cumulative increase since January 2018 to 475bps. However, the increase is in line with market expectations.

Jawed Bilwani of Pakistan Apparel Forum said the high interest rate discouraged industrial investment. “Although, the refinance rate is not increased but industrialists seldom get the refinance and businesses have to opt for expensive loans from commercial banks. With this successive increase in interest rate most of the investment would now go to bank deposits leaving the industrial sector in liquidity crunch.”

Analysts believe that this hike is a signal by the central bank that the macroeconomic situation of the country remains constrained. This increase is higher than the 25bps increase in previous monetary policy meeting in January 2019.

Khurram Schehzad, Chief Commercial Officer at JS Global Capital, said the monetary and external policy tools rendered ineffective. “Exports are not substantial and cost of doing business is already high. On top of that, the central bank jacks up interest rates and devalues rupee as if it’s going to act as a panacea to all our economic ills.

“We have to lower cost of doing business, improve ease of doing business, but we rather are raising it further through upfront price adjustments without correcting structural dents,” Schehzad added.

The State Bank mentioned continued underlying inflationary pressures, elevated fiscal deficit, high current account deficit and a balance of payment situation as rationale for policy rate hike.

The Topline Research in it post policy announcement note said the increase is a signal by the central bank that the macroeconomic situation of the country remains constrained. Primary reasons for rate hike were persisting inflationary pressures, worsening fiscal situation and continuing external account pressures. Moreover, the SBP now expects the real GDP growth rate at 3.5% vs. 5.2% in FY18.

“The above hike in interest rate comes just after this week’s visit of the new country chief of the International Monetary Fund (IMF) and increasing report regarding the upcoming IMF program,” it added.

Leading industrialist Zubair Motiwala said the interest rate was increased to contain inflation, but inflation was not high. “There is no inflation. With higher interest rates, the government only aims to discourage consumption and thus reduce imports, while the currency is devalued to artificially increase the exports.”

Motiwala said money was not going to the industry and manufacturing. “I personally know several persons who stayed their investment and expansion plans due to the prevailing uncertainty,” he said, adding, "I don’t understand whatever the authorities aim to achieve with such measures because I don’t see any benefit to the industry, economy or trade balance”.

Economist Muzammil Aslam said this government’s debt servicing would increase and he believed the government would have to pay an additional Rs100 billion as interest in the next 12 months. “Higher interest rates are not good for the stock market either as it poses additional challenges for the leveraged companies.”

The above hike in interest rate comes just after this week’s visit of the new country chief of the International Monetary Fund (IMF) and increasing news regarding the upcoming IMF program. As per reports, Finance Minister Asad Umar said that Pakistan was likely to secure a bailout package from the IMF of between $6.0 billion and $12 billion by the middle of May 2019.