Businesspeople question policy rate hike, say cost of doing business will rise

KARACHI: Business community has sharply reacted on the second interest rate hike in 25 days, saying that rising cost of doing business will hurt economic activities.

Chairman of National Business Group Pakistan and President Pakistan Businessmen and Intellectuals Forum Mian Zahid Hussain said the second hike in the interest rates by the central bank in 25 days is worrisome.

The move will increase the cost of doing business and hit the economic activities as the SBP has increased interest rates by one percent, he said.

Mian Zahid Hussain said that the hike may prove insufficient and the State Bank may increase the interest rates again in January.

He said that policy rate has been pushed to 9.75 percent in a bid to contain inflation and current account deficit and improve balance of payments. One of the purposes of raising interest rates is to curb rising imports, which, if achieved, will help the rupee recover to some extent, he added.

He said that in view of falling crude oil prices in the international market, it would have been better for industry and trade if interest rates had not been raised.

The decision of the SBP will shrink the economy and employment will decline but it may not reduce inflation and the current account deficit may exceed the estimates of the SBP.

Interest rates are likely to rise again in January again following the mini-budget as the continuous hike in prices of electricity, petroleum products, ghee, flour, milk and other commodities will further increase inflation while house rents are also rising which will also add to the hardships of the tenants.

The central bank believes that in the last six months of 2022, the current account deficit, trade deficit and inflation will be reduced, which could be a miscalculation.

He noted that the state of the country’s economy is not such that it can be improved by increasing exports and remittances; therefore, the government will have to cut several hundred billion rupees in developmental projects while also reducing its expenditure which is a difficult option for rulers.

He said that even if expenses are reduced, the government will have to borrow billions of dollars from the international market in order to avoid bankruptcy.

The country will have to pay more interest for borrowing and servicing debts after the rate hike, he said.

However, economic and financial analyst Ateeq ur Rehman has said that the biggest problem of the business community/ SMES is the higher cost of credit including the easy access to finance. It gets more critical by the increase of policy rate. SBP has announced to further increase the key policy rate by 100 basis points, which has now soars to 9.75pc.

Despite further tightening of the monetary policy, inflation is continuously growing as it stands to be 18.34% now and it is continuously rising. This is the second and cumulatively 250 policy rate increase in the policy rate during the last 26 days.

The increase in policy rate will further increase the cost of manufacturing; thus increasing the cost of goods which will affect the local market purchasing parities and exports ultimately, said Ateeq.

He added that the ghost of Pakistan’s external debt and liabilities continued to rise, reaching nearly USD 130 billion by the end of the year. Increase in policy rate will grow further the debt, which may increase the quantum of debt by Rs.600 billion. This is crucial and may be due to dictated policy of the IMF.

He urged SBP to amend and reduce the process of towering the monetary policy. President of Korangi Association of Trade and Industry (KATI) Salman Aslam has expressed concern over 1 percent increase in interest rates. He said that further increase in monetary policy by SBP to 9.75% would further increase inflation.

He said that the government was trying to control inflation by raising interest rates but in the current economic scenario this decision could not prove beneficial.

He suggested that the government should provide facilities and incentives to the export industry to increase the country’s exports and increase foreign exchange reserves, thus reducing the pressure on the rupee against the dollar.

President KATI said tightening monetary policy would freeze the economy, which would hurt the nation and country. The government-set growth target of 5% is likely to be affected.

Salman Aslam appealed to the government to take strict measures to increase exports instead of tightening monetary policy. If imports are reduced then inflation can be brought down.

He said that the SBP’s move would make loans more expensive and would further increase inflation.

Salman Aslam said that Korangi industrial area has full potential to increase exports if the government provides facilities then KATI can play its full role in increasing exports.

Copyright Business Recorder, 2021