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July 17, 2019

Stakeholders dub rate hike a big blow to business

Business

July 17, 2019

KARACHI: Business community is in utter dismay after central bank tightened up its policy rate by 100 basis points (bps) to 13.25 percent -8-year-high- for the next two months on the excuse of taming an almost runaway inflation seen threatening the economy, industry officials said on Tuesday.

“This hike would cause the actual lending rates to surge to 18-19 percent, which will not be viable for industrialists,” Mazhar Ali Nasir, advisor to president Federation of Pakistan Chambers of Commerce and Industry (FPCCI), said talking to The News.

“Cost of doing business is already high, and this increase in the interest rates will discourage industrialisation and I believe there will be no expansion in the short term”. Nasir said investors would now pull their money out from productive avenues and park it in banks, which would be offering around 11-12 percent return.

“However, we believe foreign investors will not be discourages as lending rates are much lower in the rest of the world,” the FPCCI official said. Businessmen said the central bank had adopted a faulty strategy to deal with the inflation, as an increase in the discount rate would raise the cost of doing business that would ultimately hit economic growth.

Junaid Ismail Makda, president Karachi Chamber of Commerce and Industry (KCCI), said with lending rates around 19 percent, borrowing from banks would be no longer feasible for any industry in Pakistan.

“We oppose this International Monetary Fund- (IMF) dictated increase in interest rates. The central bank is made autonomous under the umbrella of IMF and not under the umbrella of the constitution.”

Makda said industrialists had already stayed their expansion plans and this increase would prove the last nail in the coffin of industrial expansion. The KCCI official however said, “We hope things will improve on FATF front after Prime Minister Imran Khan’s visit to USA”.

Ahsan Mehanti, an analyst at Arif Habib Commodities, said the increase in interest rate was in line with the expectations and the market had already discounted its impact in the last few days.

“We don’t see any significant impact on the equity market, and we don’t see any major outflows as the bourse is already quite under-valued given political instability and revision in the National Savings rates.”

However, Mehanti said, higher interest rates would impact the profitability of leveraged corporate sector given dismal economic outlook, which would be reflected in the upcoming corporate earnings seasons.

The analyst added that market was betting it to be the last upward revision in the interest rates as inflation was set to ease and it was hoped that central bank’s monetary policy stance would follow the suit.

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