Disappointing decrease

In a disappointing move, the State Bank of Pakistan (SBP) has announced that the interest rate will be down by just 75 basis points – from 13.25 to 12.5 percent. Pakistan’s business community is right in pointing out that the policy rate cut is too little to make any significant difference to the economy. Ever since the current government has assumed power, the local industry has been a hostage to high borrowing rates presumably just to retain foreign debt. Though the government has claimed that the decision was taken based on a lower predicted inflation forecast, some economic experts have questioned the rationale of this insignificant reduction.

It is true that there are serious concerns about the coronavirus pandemic and its potential impact on the external and internal demand, and more serious efforts are needed at the moment. But, as inflation is still, according to the SBP’s own estimates, hovering around 12 percent, this insignificant reduction in policy rate is disappointing. In January, the National CPI inflation was over 14 percent and it has not come down substantially in the first quarter of the calendar year 2020. As the custodian and formulator of the country’s monetary policy, the SBP thinks this meagre reduction is appropriate but all indications show a different picture.

The SBP has also announced two more steps that it believes will mitigate the economic woes of Pakistan and will also enable the country to tackle the likely impact of Covid-19. It has promised a refinance facility (RFC) for combating the epidemic the country is likely to face. With this scheme, banks will get loans at zero markup and they in turn will offer loans to hospitals at three percent for five years. This is to enable major hospitals in the country to purchase equipment needed to manage Covid-19. The SBP will offer a temporary economic refinance facility (TERF) to encourage new investment in manufacturing sector. These steps are timely but it remains to be seen what impacts they have on the targeted sectors of the economy. Under the TERF, the SBP will refinance banks to provide financing at a maximum end-user rate of seven percent for ten years for setting up of new industrial units. The scheme promises a hundred billion rupees with a maximum loan size per project to be not more than five billion. Representatives of business and industry have, however, also called this SBP offering an eyewash and too late by way of anything substantial. The country has already been showing the lowest growth rate in decades. What it needs right now, in the midst of a pandemic that threatens to affect the economy in a crippling manner, is thoughtful and sympathetic economic policymaking.