KARACHI: The country’s steel industry is facing a serious crisis due to higher interest rate and delay in opening of Letters of Credit (LCs) for import of raw materials and spare parts.
Industry sources said that the steel industry is facing a severe liquidity crunch due to worsening economic conditions and many small to mid-sized mills have already shut down. The current situation will structurally damage the steel industry for decades to come.
Pakistan Association of Large Steel Producers (PALSP) have demanded immediate cut in the key policy rate and urged that the policy rate must be in single digit in line with regional countries to overcome the ongoing economic crisis and the country to survive.
According to PALSP, Pakistan’s entire industry in general and the steel sector in particular are fighting for sheer survival and are concerned with the current economic situation that is getting worse day by day.
The steel industry also fears of more burdens, which is expected in the shape of further monetary tightening in the upcoming monetary policy to be announced on August 22, 2022. Currently, the key policy rate stands at 15 percent, which is the highest since the last two decades last seen in April 1999.
The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has cumulatively raised the key policy rate by 800 basis points (bps) in the previous seven meetings since September 2021. The steel industry is expecting a further hike in the next MPC meeting.
The upcoming monetary policy will be disastrous, if further tightened and will set to shutdown industries of Pakistan. The unemployment rate will increase, if the interest rate is not reduced, immediately.
“At this interest rate businesses and industry are unable to plan expansions or initiate working capital. It is difficult for the business to sustain in a situation in which interest rates doubles in only 8 months”, the PALSP said.
The steel industry believes that the interest rate of 15 percent is unsustainable for the industry, while the other regional countries’ benchmark interest rate is very low.
Secretary General PALSP Wajid Bukhari, in a statement, said that the benchmark interest rate in Malaysia was 2.25 percent, Indonesia 3.5 percent, China 3.7 percent, Bangladesh 4.75 percent and India 5.4 percent. The current policy rates do not make any logic as it has resulted in further difficulties for the industry.
“The policy rates must be reduced in the upcoming monetary policy and to be in single digit in line with our regional countries”, he demanded.
In addition, he said that industries are facing problems opening in LCs for import of raw materials as spare parts and even consumables items falling under Chapter 84 and 85 have become impossible to seek approval from SBP for the opening of LCs.
“Our members are complaining that LC opening approvals from SBP are not coming, whereas banks are also hesitant to open LCs for the import of raw materials”, he informed.
Pakistan’s scrap imports were 164,699 metric tons in May this year, the lowest since March 2014, decreasing by 47.6 percent compared to April and by 38.2 percent year-on-year, he mentioned.
In the month of June, scrap imports ranged at around 210,000 metric tons, whereas July scrap imports are tentatively less than 100,000 metric tons, making it the lowest in the last two decades. Mills have started to shut down as the supply chain is shocked.
PALSP said that the government set an inflation target at 11.5 percent for this fiscal year but the SBP has given an inflation range of 18 percent which is still very high considering falling oil prices, softening of commodities and revaluation of the rupee.
The core inflation in June and July clocked in at 11.5 and 12 percent, respectively. Furthermore, abnormally high policy rates cannot fix supply chain related issues.
Other countries have demand-based inflation whereas Pakistan pricing pressures are import related, resulting in a depression of an already fragile economy by crushing the demand to a standstill. The cement sales in the month of July have fallen by 60 percent, whereas automobile sales have been crushed by 89 percent.
The association said that as per UNDP report Pakistan needs to create 4.5 million jobs over the next five years. However, right now, the unemployment rate is increasing at the fastest pace in the history of Pakistan.
Copyright Business Recorder, 2022