Cut in interest rate by one percent: Business community hastens to tell SBP it's 'too little, too late'

KARACHI: The business community, while reacting to the State Bank of Pakistan's reducing the interest rate by one percent, said on Friday that despite a clear message given by all segments of the economy, particularly trade and industry, the reduction in policy rate by one percent was surprising and unfavorable to the bleeding economy.

Former president of the Karachi Chamber of Commerce and Industry (KCCI) and the Chairman of Businessmen Group (BMG), Siraj Kassam Teli, and President of KCCI Agha Shahab Ahmed Khan expressed their disappointment over a meager reduction of just one percent in the policy rate by the SBP, terming it "too little, too late". They said that the KCCI had been demanding of the SBP for a long time to bring the policy rate down to 4% in one go instead of doing it in installments.

Reduction in policy rate in bits and pieces did not provide the much needed thrust to economy whereas a one-time major reduction of 4% could have triggered growth and accelerated economic activities.

Reduction in policy rate piecemeal was not enough to stimulate the economy, and it was necessary to significantly reduce the interest rate in a single step to rescue the trade and industry which was going through an unprecedented crisis.

Revision in the policy rate to 7% would effectively mean the interest rate for large-scale borrowers would be 8% to 9% after adding the bank's spread while it would not be less than 10% to 12% for smaller entities.

Siraj Teli and Agha Shahab reiterated their stance that the business and industrial community had been going through difficult times, and many would not be able to survive the economic crisis.

Nearly all the major economies of the world had supported their businesses by reducing their policy rates to as low as zero percent realizing the gravity of a global economic meltdown and its impact on businesses.

It was surprising that the decision makers at the SBP and its governor did not have the perception of ground realities in Pakistan and the serious economic challenges the country would face in the near future if growth did not pick up soon.

They said that there was now ample justification for a meaningful reduction in the policy rate because inflation had declined sharply due to a steep fall in the prices of crude oil, commodities and raw materials while demand had also been suppressed. Therefore, it was imperative to support the business and industrial community at such a critical time through further reduction in the policy rate.

The chairman of BMG and the president of KCCI underlined the fact that the KCCI had conveyed its reservations to the prime minister on various occasions and also to the governor of the State Bank of Pakistan during his visit to the KCCI before the pandemic over astronomically high interest rates which stifled growth and increased the cost of doing business.

They hoped that realizing the gravity of the situation, the State Bank would once again review its monetary policy at the earliest and revise the policy rate downward by another 300 basis points to provide much needed thrust to economy and trigger growth in the face of upcoming challenges created by the Covid-19 pandemic that had affected the entire world.

The President of the Federation of Pakistan Chambers of Commerce and industry (FPCCI), Mian Anjum Nisar, appreciated the State Bank of Pakistan for slashing the key policy rate by 100 basis points to 7 percent in an unscheduled meeting of the Monetary Policy Committee which had so far slashed the key interest rate by 6.25 percent from 13.25 percent since March 17, 2020. He said the rate cut was a welcome move, but only 100bps (basis points) cut was not enough. In the prevailing circumstances, interest rate at 7 percent was not feasible for the businesses, he said.

"The FPCCI hopes the central bank will consider the plights of the business community and rates would be brought to 5 percent soon," he added.

Mian Anjum Nisar said that the businessmen's apex body welcomed the central bank's move to cut the interest rates by 1 percent, urging it to bring the discount rate down to 5 percent in line with global financial trend. "This is a commendable step of the State Bank, as it has now started shifting toward supporting trade and industrial growth and employment generation which is not possible without a sizeable cut in the key policy rate," he added. He said that the banks should now also be advised to follow the lines of the SBP accordingly.

"The banks should be instructed to revise KIBOR on a monthly basis instead of quarterly basis to pass on the benefit of lower rates speedily to the trade and industry, which are struggling to survive," Mian Anjum Nisar said and added that the impact on banks on their deposits would be insignificant.

The FPCCI president said that the reduction in policy rate by 6.25 percent since March 17, 2020 was a commendable step of the government in the present situation that would positively affect the cost of doing business and encourage the investors and industrialists to make new investments in the country.

Mian Anjum Nisar also said that COVID-19 had pushed the global economy towards depression and its resulting contraction in the economic activities and threatening employment. He asked the SBP to go the extra mile in these arduous times and leave no stone unturned in providing relief to the financially distressed businesses.

This cumulative reduction of more than 6 percent in the interest rate would cut cost of production, strengthen debt repayment ability and improve credit worthiness. He said as per estimates August inflation numbers would be below 5 percent due to the high base effect and depressed demand due to the lockdown and other negative effects of COVID-19.

Copyright Business Recorder, 2020