- Say increase in policy rate is unlikely to tame inflation as it is fueled by supply and not demand
ISLAMABAD: The State Bank of Pakistan (SBP) decision to increase policy rate by 100 basis points is unlikely to appease the International Monetary Fund (IMF), and additionally by raising the cost of borrowing it will have a negative impact on investment and economic activity.
This was the unanimous view of economists and businesses community, who added that increase in policy rate is unlikely to tame inflation as it is fueled by supply and not demand. As borrowing costs of the business community rise, they would recover it from end consumers. An increase in policy rate will raise the budget deficit by increasing debt servicing. An official on condition of anonymity said that a one percent increase in policy rate contributes aboutRs170 billion to the budget deficit.
Former Finance Minister Dr. Salman Shah told Business Recorder that increase in discount rate is not enough to satisfy the IMF as the country requires major reform decisions for the success of ninth review – decisions the government is not ready to take. Shah added that the increase in policy rate would neither strengthen the rupee, nor tame the historic high inflation, which is twice the interest rate.
The Rawalpindi Chamber of Commerce and Industry (RCCI) President Saqib Rafiq expressed concern at the increase in the interest rate and urged the government to withdraw it as it would adversely impact on industrial activities in the country.
Pakistan needs to quickly revive business and industrial activities to improve the ailing economy, but a 100 basis point increase in interest rate would make the cost of credit unaffordable and badly affect efforts for promoting business activities, he argued.
Chairman Pakistan Readymade Garments Manufacturers and Export Association Ijaz Khokhar expressed concurred and stated that in the current scenario the rise in interest rates would further increase cost of production making industry uncompetitive in the international market compared to other regional countries.
Khokhar added that due to high price of gas and electricity manufacturers are facing difficulties in meeting external orders adding that an increase in the policy rate would also hit the SME sector adversely. Javed Bilwani of Pakistan Hosiery Manufacturing and Export Association said that all three economic indicators are on a downward trajectory - exports, remittances and industrial growth.
He added that if the prevailing situation further deteriorates it may result in law and order situation as people are being laid off. Bilwani contended that the SBP Governor appeared powerless and lamented the government’s refusal to listen to any suggestions made by the business community to deal with the economic situation.
Copyright Business Recorder, 2023