Business community taken completely by surprise by no change in key policy rate

KARACHI: Business community has shown displeasure over 7th status quo in the key policy rate.

KCCI President Iftikhar Ahmed Sheikh said the SBP’s decision to keep monetary policy intact was very surprising as the business community expected cut by 150 to 200 basis points due to declining trend of inflation and signs of economic recovery which have started surfacing as the IMF and the World Bank predicted Pakistan’s GDP expanding by 2pc in FY24.

He was of the view that the unprecedentedly expensive borrowing rate has caused too much loss to the economy, particularly the cost of doing business, which has grossly suppressed the manufacturing sector.

“The finance minister also recently hinted at a rate cut and we, during our meeting with Prime Minister Shehbaz Sharif at CM House also requested to look into the possibility of rate cut which, unfortunately, has not been done due to reasons best known to central bank,” he added.

Pakistan Business Forum (PBF) showed displeasure towards the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) kept the key interest rate steady at 22% for the seventh straight meeting.

The central bank decision is not encouraging for the industry which has been demanding that the policy rate should come down to 16 percent,” Ch. Ahmad Jawad, the Vice President of PBF told Recorder.

Jawad said that the PBF stance has been consistent that the high policy rate is not economically feasible for the industry and the businesses to operate and said on the other hand, this would add to the inflation as the high financial cost would be passed on to the consumers.

“The SBP should focus on core inflation rather than general inflation on an immediate basis as these exclude the most volatile components of the basket and has demanded that the government must ensure the effectiveness of price control measures through an active Competitive Commission of Pakistan, a robust price control magistracy system, and vigilant actions against hoarding and malpractices,” he added.

He said the effectiveness of increasing policy rates as a tool for controlling inflation is questionable. “For example, even after a significant increase in the policy rates by 1500 basis points, from 7 percent in August 2021 to 22 percent in April 2024, inflation continued to rise sharply, escalating from 8.4 percent to 23.1 percent during this period, indicating a potential misalignment between policy measures and inflationary dynamics.”

He said the sharp increase in prices can be attributed primarily to several factors on the supply side, including elevated international commodity prices, disruptions in global supply chains, crop damage due to floods, currency devaluation, and domestic political uncertainty. “Despite these supply-side challenges, the State Bank, following IMF recommendations, has primarily employed demand-side measures such as policy rate adjustments to address the issue of double-digit inflation,” Jawad added. “This approach contradicts international practices.”

He said that Pakistan’s credit accessibility for the private sector, as a percentage of GDP, is notably lower than that of its regional counterparts due to exorbitant interest rates, the crowding-out effect, and stringent collateral requirements.

“Specifically, the country’s policy rate is the highest in the region, with collateral requirements escalating to 150 percent of the total loan value, which notably restricts the growth of Small and Medium Enterprises (SMEs). Alarmingly, only 7 percent of Pakistani firms engage with formal lending institutions, in stark contrast to 21 percent in India and 34 percent in Bangladesh.”

Ahmad Jawad said why not the SBP understand that 22 percent with two to three percent KIBOR escalates the overall financial cost to 25 percent which is not economically viable for the industrial sector to operate.

The cost of credit and access to finance continues to remain tough for common man, said Ateeq ur Rehman (economic & financial analyst).

In the past we have neglected spending on human development like healthcare, education, sanitary and clean water, also the acquisition of skills.

The fact is, this all needs funds and at times the borrowed funds, which looks impossible under such policy rates.

He added that for us the economic growth is a biggest challenge in the country dominated by young and growing population, they need money for incubation, startups, entrepreneurship, etc. Under such circumstances obtaining finance is so expensive that it is not feasible.

Further, the main reasons behind Pakistan current account economic problems is country’s unmanageable level of public debt.

The government finds it more challenging to pay off the country’s debt due to the record high policy rates. Our domestic debt is nearly Rs.42.67 trillion Ateeq said.

Indeed, the policy rate is huge and unreasonable.

Copyright Business Recorder, 2024