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Slashing of interest rate a good omen for trade and industry

Published on 23rd Feb, Edition 8, 2015

 

The rate cut will not only give boost to local investment but can also woo foreign investors

Finally, the State Bank of Pakistan (SBP) made a drastic cut of 100 basis points in the interest rate to bring it to an eight-year low of 8.5 percent for the next two months, which people hailing from trade and industry have taken positively and said it would help stimulate private sector growth.

In Pakistan lack of capital was a major obstacle in the way of establishment of heavy industries. The Pakistani society is mostly consumer-oriented so the savings rate is hardly 13 to 14 percent, which is very low. Provision of ample cheaper liquidity was a must to create new businesses but in the last five years the higher interests kept the private sector growth at the lowest ebb, causing huge damage to the businesses and unemployment graph also witnessed an unusual surge.

On the other hand, banks follow stern conditions and tiresome procedures while advancing loans to consumers. Mostly bank loans are granted to affluent persons while the smaller businessmen are dejected in a number of ways.

Pakistan is perhaps one of the few countries in the Asian region where the interest rates are still very high. The country lags behind its neighbors in economic development and exports due to energy crisis. As compared to Pakistan, India’s current interest rate is at 4.7 percent, Japan 0.1 percent and China 5.31 percent, thus one can clearly see the difference.

Business leaders said the recent cut in interest rate would help ensure availability of cheaper money to cash starved private sector besides encouraging the potential foreign investors for investment in Pakistan. They hoped that in the upcoming monetary policy, the interest rates would further be lowered to seven percent.

According to them, the cut will not only give boost to local investment because of ease in the cost of doing business but the confidence of foreign investors will also go up and they would be willing to put their money in new ventures in Pakistan.

They said Governor SBP must review all other economy related banking policies and facilitate the private sector that was a engine of the growth. They said that reduction in interest rates will cut 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.

 

Textile industry

Chairman APTMA S. M. Tanveer believes 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.

According to him, reduction in the interest rate is a good omen and it is a step in the right direction enabling environment for sustainability and expansion of textile industry in Pakistan.

All Pakistan Business Forum (APBF) President Mr. Ibrahim Qureshi said the SBP Governor deserved appreciation for bringing down the interest rate to 8.5 percent from 9.5 percent. However, Ibrahim Qureshi called for measures to overcome energy crisis, security challenges and political instability to make interest rate cut meaningful and result-oriented. He said that business community continued to term a considerable cut in policy rate a panacea to low investment phenomenon.

Former Finance Minister Dr Salman Shah stated that the SBP would have to make a large cut in interest rate for the revitalisation of the country’s economic growth. However, the cut in discount rate by 100 basis points would definitely yield some positive impact. He said that Pakistan has no employment generation, as industries are being closed down and non-performing loans are rising, posing a threat to industrial growth. The government should make a substantial cut in non-development expenditure and focus on revival of growth.

Financial experts believe that the State Bank approach toward monetary policy is rather conservative and is based on its own analysis of the situation. The continued tight monetary policy in the past has paid some dividends in reviving economic and financial stability but in view of the latest internal and external development, the SBP approach from now onwards should be beneficial to both the businessmen and the general public, they added.

Business leader S. M. Naveed said the government should bring down electricity rates, logistics in the falling oil price scenario. He said that lower interest rate triggers borrowing and investments. 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.

While installments by International Monetary Fund (IMF) and Sukuk bonds helped improve the foreign exchange reserves, it is expected with improved macro economic conditions, business sentiments are likely to strengthen. Availability of cheap raw material, low input cost, and healthy construction activity, as indicated by higher cement sale and steel production, are expected to benefit commodity producing sector.

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