Thursday January 27, 2022

Monetary tightening seen weighing down on growth

November 20, 2021

KARACHI: Businessmen on Friday balked at a 150 basis points (bps) hike in policy rate, calling it too high for borrowing industries to handle, owing to its onerous implications on ‘cost of doing business’ already heading north.

State Bank of Pakistan (SBP) jacked up the policy rate to 8.75 percent from 7.25 percent in a bid to thwart inflation and ‘balance of payment’ risks. Reacting to this higher-than-hoped monetary tightening, Federation of Pakistan Chambers of Commerce & Industry (FPCCI) termed it a “negative development”, which would further burden the industry in the wake of high cost of business and prices of inputs. “We were expecting the policy rate to rise, but not so much”, said Nasir Hayyat Maggo, President FPCCI, while talking to The News International.

“We were expecting a 50bps or maximum 75 bps hike; however, a raise of 150bps is too high for the businesses.”

Maggo said inflation in Pakistan was cost-push, which spiked due to surging prices of commodities in world markets as well as deprecation of rupee against the dollar. “Economy doesn’t have the capacity to absorb the high interest rate as it was already struggling with the weak exchange rate,” he pointed out.

Maggo agreed the move was made to meet International Monetary Fund’s (IMF) terms and conditions and said the freehand given to SBP was in fact making the matters complicated for the country as well as industry. Ruling out the impression that high interest rate would dent credit off-take to industry, Maggo said in reality only large businesses were the beneficiaries of bank credits. “SMEs are still deprived from this facility and will remain so in the present situation,” said FPCCI chief.

Asif Inam Rana, Chairman All Pakistan Textile Mills Association (APTMA) South Zone, described the rate hike as huge. He, however, added that the step had been taken to stabilise the currency situation in the country. “Economy is already red-hot as all sectors are performing exceptionally well and would not be adversely impacted by the latest development,” said Rana said explaining the impact of this monetary tightening on economy.

He said the hike was apparently aimed at cooling off the red-hot economy.

“Exporting industry is already enjoying the export refinance facility and is unlikely to suffer from interest rate hike.”

The interest rate hike would impact the consumer financing especially the auto-financing as well as reduce the hoarding of commodities as high interest rate would make borrowing costlier for hoarders, Rana said. FPCCI’s Maggo, however, didn’t subscribe to the view that economy was red-hot and rate hike would allow it to cool off.