This is apropos a Business Recorder op-ed “Early warning signs” carried by the newspaper yesterday. The writer, Dr Hafiz A. Pasha, who is undoubtedly an eminent economist, has, as usual, presented a highly informed perspective on the situation.
The writer has argued, among other things, that “the source of worry is the contraction in bank credit to the private sector by Rs 223 billion as of the 1st of September.
Clearly, the extremely high interest rates are impacting severely on private investment. The likelihood of a 38% jump in private investment, as per the IMF projection, is very low”.
No doubt, the writer has hit the nail on the head when he points out the challenges facing the country’s economy.
In my view, one of the reasons behind lower private sector off-take is prohibitively high interest rates. Higher interest rates have adversely impacted small businesses’ cash flows; they put a significant crimp on financing for entities with smaller payrolls and valuations in particular. We all know that most of the small businesses work on very small margin.
Therefore, even a very small hike in interest rates causes harmful effects on their financial situation. It is believed that SMEs in many cases take as high as a 14 percent hit in the event of even one percent (100 basis points) hike in interest rates.
Be that as it may, sanity seemed to have prevailed as the Monetary Policy Committee of State Bank of Pakistan on September 14, 2023, in a surprising move, decided against further raising interest rate.
In other words, the policy rate was kept unchanged at 22 percent owing to whatever reasons; it was a highly positive development nevertheless.
The central bank is requested to ask banks to boost private sector lending from the present seemingly very poor levels so as to help businesses to somehow overcome their cash flow challenges as early as possible.
Naseer Awan (Karachi)
Copyright Business Recorder, 2023
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