Craving a sentiment boost

Clamouring for a rate cut in the discount rate is a much engrained custom that plays out in every run-up to the monetary policy announcement by the State Bank of Pakistan. As the central bank prepares to set its stance towards inflation and economic growth, calls for a sharp reduction in the benchmark for cost of funds are being raised on cue.
But even as the central bank is largely expected to scale down the discount rate by 100 basis points; this time around the private sector is eyeing a much sharper reduction in the benchmark rate. Of course, if wishes were horses, men would fly but there are handful of indicators that support a dovish stance by SBP.
The foremost prompt comes from real interest rates that are currently trending over 200 basis points, compared to an average of less than 150 basis points (5 year average), highlights a research report by Shajar Capital.
International oil prices are largely expected to settle around the $50-60 per barrel mark for the next few months and domestic inflation has also tapered considerably.
But there are other considerations at play here. Various measures of business confidence show small, medium and large firms are all skeptical of growth prospects in coming months. The Business Confidence Index maintained by the Overseas Investors Chamber of Commerce and Industry reported that new orders and new investments are expected to trend lower in coming six months.
The "Assessing Risks to Microfinance in Pakistan" report by The Microfinance Network (released in November) reported that respondents consider macroeconomic trends to be the biggest risk and the fastest rising risk to the sector.
In a press conference on Monday, Finance Minister Ishaq Dar expressed hope that the GDP growth in the current fiscal will clock in just over five percent. At that fixture, he acceded that credit off-take by the private sector is anemic. The projected growth rate is also much below the long-term sustainable target of seven percent needed to employ the country's burgeoning populace.
Just as domestic demand is sluggish, international markets do not paint a pretty picture either. The country's exports in the current fiscal are down by 4.31 percent compared to 5MFY14. Most alarming within this tally is the poor showing by key sectors like textiles and leather goods; export industries that employ a large proportion of the workforce.
Given a weak economic outlook for key export markets such as the European Union and the Middle East, exports will likely remain weak in the remainder of this fiscal. Stronger domestic demand could well be a panacea for the sputtering economy.
Bringing down the cost of borrowing will not end with a sharp cut in the discount rate; banks have to be prodded further to move away from lazy banking reliant on loans to the government. However, the opportunity exists to significantly alter the credit landscape and the usual calls for drastic reduction in interest rates are not without substance, this time.