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ISLAMABAD: There is a critical need to bring inflation down so as to insulate public from the regressive ‘inflation tax’, as well, as to support economic growth at a sustainable basis and to reduce poverty in Pakistan.

Sources in the Finance Ministry said this was submitted by the State Bank of Pakistan (SBP) in writing to a Senate Finance Standing Committee on the impact of high interest rate for business community.

In response to rising inflation, the SBP has been pursuing a tight monetary stance since September 2021. The monetary tightening efforts by SBP have been supplemented by a contractionary fiscal policy stance to contain inflationary pressures in the economy.

High interest rate environment

These policies have begun to yield results. Inflation, which peaked at 38 per cent in May 2023 moderated to 27.4 per cent in August 2023. These measures, as expected have; however, led to a slowdown in economic activity. The real GDP in fiscal year is expected to grow in the range of 2-3 per cent, after witnessing a low of 0 3 per cent in fiscal year 2023.

To sustain this recovery and achieve higher economic growth over the medium-term, it is vital to bring inflation down within its five to seven per cent medium-term target range. Inflation has though peaked, and come down in recent months; it is still very high and warrants stabilisation measures to continue.

Therefore, it is critical to bring inflation down so as to insulate public from the regressive inflation tax, to support economic growth at sustainable basis and to reduce poverty in Pakistan, the SBP added.

Moreover, the reduction in inflation will allow businesses to make more reliable plans when taking decisions about borrowing and capital expenditure to expand their businesses, according to the SBP.

Copyright Business Recorder, 2023

Comments

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Retired Oct 08, 2023 10:20am
This high interest rate debate in Senate exposes the incompetence of our lawmakers when it comes to financial matters! Interest rate is not the issue, the issue is high government borrowing. More than 80% debt in Pakistan is taken by the government! Think about it, would any financial institution continue to lend to any entity at fixed rate forever. Especially when that said entity is undisciplined in it's fiscal spending, suffers from inefficiencies and increases it's borrowing every year! The interest rate is still in negative territory as its less than inflation. Maybe these lawmakers should concentrate on reducing govt expense to lessen need for borrowing. How about a smaller protocol and less free electricity Jack!!!
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Khawar Oct 08, 2023 11:36am
Increasing interest rate by SBP works where economy is too much controlled. Pak economy is on the other way. Here increasing the interest leads to the collapse. In Pak economy is to managed by reducing the rates to operating expense level. This will yeild the following. 1. Increase the production, increase in employment, increase in the tax, reducing the input costs and ultimately lead to reducing the inflation.
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Maqbool Oct 08, 2023 12:48pm
At These Interest rates makes no sense for investments as no Legal Business makes enough money to pay interest and make profit. Reduce Govt spending like : duplicate Ministries, ghost workers, ghost pensioners etc to start with. Something doable in a short time frame
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TheActualTruth Oct 09, 2023 08:21am
When the primary reasons behind inflation are global commodity prices, junk national currency, economic incompetence of managers and most importantly political instability, how would high interest rates fix these problems. The inflation is not due to high circulation of currency it is due to other factors but our monetary and economic managers are so dumb that the just blindly follow the Keynesian economics playbook without having the ability to understand the logic behind it.
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Khawaja Mazhar Oct 09, 2023 11:09am
@Maqbool what is the financial impact of having few ( not that I am in favour of keeping them) duplicate ministries as compared to billion of rupees being bled through PIA over employment/ mis-management ?
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Anwer Jamil Oct 10, 2023 07:36am
@Maqbool , Can you please provide evidences about the ghost employees and ghost pensioners?
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