Higher mark-up rates will drive economy to the verge of collapse: Saifullah

PESHAWAR: Former federal minister, Salim Saifullah Khan has said that the escalating mark-up rates are poised to push the economy to the verge of collapse.

Over the last one year, interest rates have gone up at unprecedented pace, resulting in significant slowdown of economic growth and mounting “infection ratio” in banks as borrowing costs surged. As a consequence, the loan default ratio has surged, painting a challenging picture for the financial sector. The State Bank of Pakistan has implemented its largest policy rate hike, marking the ninth increase since September 2021.

Speaking to media, Salim Saifullah Khan highlighted that fuel prices in Pakistan have surged by approximately 90% since April 2022. Concurrently, the government has terminated fuel and energy subsidies to the industry and is working towards curbing expenditures while negotiating with the International Monetary Fund (IMF) to resume a bailout programme. The country’s foreign currency reserves have seen a sharp decline, almost halving since August of the previous year. In line with IMF directives, a 10% tax on large-scale industry for one year has been imposed, meeting one of the key demands put forth by the IMF.

Salim Saifullah Khan expressed his concern over an astronomical 300 basis point policy rate hike, deeming it entirely unacceptable as it discourages borrowing. In today’s challenging economic climate, businesses struggle to achieve a mere 25% profit. “Who will seek loans at such exorbitant rates?” he questioned. The combination of a robust dollar and soaring energy tariffs has significantly increased the cost of doing business, rendering Pakistani goods uncompetitive in the global market and unaffordable for the average citizen. The impact of the surging dollar is evident in the exorbitant prices of petroleum products and the skyrocketing energy tariffs.

Emphasizing the need for cautious handling of the situation, Salim Saifullah Khan warned against excessive devaluation, which could prove detrimental to the economy, exacerbate unemployment, and unleash uncontrollable inflation. He noted that the policy rate hike would primarily impact the formal sector, leading to an upsurge in loan defaults and undermining the stability of the banking system.

He highlighted that simply raising interest rates would not effectively address contain the inflation and strengthen local currency. Pakistan’s inflation is primarily driven by supply factors and depreciation, making interest rate hikes insufficient to rein it in or incentivize savings in local currency.

In light of these challenges, Salim Saifullah Khan called upon the State Bank to explore alternative solutions instead of solely relying on interest rate hikes to tackle inflation. By facilitating easier access to loans and creating an environment conducive to industrial growth, the country can foster job creation and economic prosperity.

Copyright Business Recorder, 2023