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Keeping interest rates lower can woo foreign business

Published on 11th Aug, Edition 32, 2014

 

With the monetary policy having been announced by the State Bank of Pakistan, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has expressed their concern. The president of the FPCCI, Mr. Shaukat Ahmed was of the opinion that keeping the policy rate unchanged was not seen as a measure taken to implement policy rather it is an act of escapism; a means by which the necessary measures were being avoided to be taken. With the government claiming there to have been a drastic decline in the country’s rate of inflation, there is enough opportunity to lower the interest rate which would further attract investments. He was of the opinion that the government had not taken up the opportunity to facilitate the industry and not allowing such progress to occur by the simple reduction in interest rates.

In terms of money market regulations, Pakistan is ranked at 102 out of 152 countries with the control on interest rates being the weakest area for the nation. In a world where globalization and liberalization is at its peak, the economy making the business sector of the country uncompetitive is certainly very surprising.

With the rest of the world following monetary policies based on expansionary basis in order to boost their economic growth by boosting the manufacturing sector and thereby promoting employment, Pakistan is not following suit. Compared to other countries, Pakistan has an interest rate of 10.2 percent whereas countries such as India has a rate of 8.6 percent, China 4.7 percent, Malaysia 3.36 percent, USA 0.23 percent, France 0.21 percent, Germany 0.21 percent and Japan having a rate of 0.13 percent. Considering these rates of other countries, the interest rate in Pakistan is very high and is not one which is supportive of the industrial sector. with the State Bank of Pakistan using a high monetary policy as a means of controlling the inflation in the country, it is losing out on the opportunities and benefits associated with lower interest rates; which other nations seem to be implementing in their economies.

According to the governor of State Bank of Pakistan, Mr. Ashraf Mahmood Wathra, reasons behind keeping the interest rate unchanged at 10 percent was because economic conditions seem to be better at this point than what they were a year ago. An assessment of the economy, however, deems there still are a number of vulnerabilities and challenges which continue to exist. In order to achieve development and a stable economy, reforms and policies are still a requirement. The governor of SBP also stated that while the rate has remained unchanged, the sentiments of those in the market are also being managed by supplementing the policy with calibrated liquidity operations in the inter-bank market. He was of the opinion that doing so has not only contributed towards achieving stability in the foreign exchange market but has also helped in building up the nation’s foreign exchange reserves.

 

The government had also borrowed a sum of Rs303 billion from the banking system during the fiscal year 2014 which is 21 percent of the amount borrowed in 2013 i.e. Rs1.446 trillion. The government was of the opinion that a lower amount of borrowing and a deceleration in broad money was projected to be 12.9 percent in the upcoming fiscal year 2015 which would also contribute towards low inflation. The governor stated that the average CPI inflation in the previous year had been 8.6 percent and had been for the second consecutive year, in single digits. “For FY15, the SBP expects the average CPI inflation to remain in the range of 7.5 percent to 8.5 percent. While this may be the desired level of inflation, the price of oil with its uncertainty and unanticipated price shocks are likely to pose a great threat to the outlook of the inflation level.”

Despite challenges on the security front and energy, the real GDP in the country was seen to grow by 4.1 percent in the fiscal year 2014. Investment expenditure as a percentage of the GDP had, however, declined which is an indication of the problems to be faced in the country’s future productive capacity.
The governor also made it clear that the growth in domestic debt in the fiscal year 2014 had decelerated to 14.5 percent, which was lower than the 27 percent average growth which had been experienced during the previous three years. This deceleration was good for the country in terms of its risk perception and would thereby be a factor in help bringing investments into the country.

On the whole, the interest rates and the rate of borrowing money in Pakistan as compared to other nations in the region and the world are comparatively much higher. Despite inflation rate for the current year being in single digits and Pakistan experiencing decelerating growth in domestic debt, the country seems to be moving in the right direction. In order for Pakistan to be economically viable for investments from abroad and to ensure the GDP increases significantly, the interest rates in the country need to be controlled and brought down to single digits so that it can support the industrial boom that Pakistan is facing.

Over the past year, the interest rates in the country have remained stable at 10 percent, which is a positive sign. However, in order for investments to increase in the country, the interest rates need to be lowered to ensure economic development and an increase in investment in Pakistan. Currently, there are a number of countries in the region that are offering much better and more competitive interest rates which in turn leads to an increase in investment in those countries rather than Pakistan. In order for Pakistan to be able to compete with these countries on a global scale and to increase economic growth of the country, the interest rates need to be lowered and brought down to single digits, which would lead to increase investments and in turn can bring economic growth in the country.

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