KARACHI: Terming the recent cut in interest rate insignificant, experts and industry leaders have asked the State Bank of Pakistan (SBP) to go for more cut in the interest rate that is already very high.
Ateeq ur Rehman, economic & financial analyst, said the State Bank of Pakistan announced on Monday that it had decided to cut the key interest rate by 100 basis points to 19.5 per cent from the previous rate of 20.5pc said. This small rate cut is very upsetting for the business community, industrialists, manufacturers, small & medium business entrepreneurs, as well as, individuals.
He said that the further government borrows almost 80% from local banks to meet its fiscal requirements and hardly 20% is left for private borrowing which creates a very difficult situation for small traders/ business community as they have to borrow on very high rates.
The huge borrowing cost always reflects the increase in expenditure and cost of doing business. Pakistan is facing a huge challenge in terms of debt distress; secondly the country is stuck in a low economic growth equilibrium and multiplier.
We are a debt-oriented country and facing acute economic challenges due to paucity of resources and financial losses. In order to cover financial shortages & losses, government borrows heavily from local banks on heavy interest rates thus increasing the size of actual loan.
Moreover, SMEs doesn’t have sufficient resources and normally work on marginal profit; therefore, when they are forced to borrow, they remains to be prey of huge utility tariffs, massive taxes, huge interest rate, he said.
For a fact, industries in general and industries of the SME sector in particular are on the verge of collapse due to difficult access to finance after sustaining financial losses and high cost of credit, he said.
Ateeq added that if we have to pull our country out of the current malice, radical decisions have to be made for a big reduction in interest rate and cut in electricity, gas tariffs and petroleum prices.
However, Johar Qandhari, President of the Korangi Association of Trade and Industry (KATI), expressed disappointment over the State Bank of Pakistan’s decision to reduce the interest rate by 100 basis points, setting it at 19.5%.
Qandhari labelled the cut as insufficient, arguing that the business community has long called for a more substantial reduction. He pointed out that Pakistan’s high interest rates have contributed to inflation, capital shortages for industrialists, and an inability for businesses to afford expensive bank loans.
“The SME sector and other industries cannot sustain themselves with such high interest rates. A significant reduction is necessary to foster industrial growth and create employment opportunities,” he said, adding that even when inflation was at 11% in May, the interest rate remained unchanged, leading to further inflation increases to over 12%.
Qandhari emphasised that high interest rates have slowed economic growth. “Reducing the policy rate substantially would enhance economic growth and industrialization. The current rate of 19.5% is simply too high for businesses to thrive,” he stated.
The KATI President warned that the continued high interest rate could lead to a severe economic crisis. “Industries are facing capital shortages and cannot afford to operate under these conditions. This could result in industrial closures and increased unemployment,” he cautioned.
Qandhari also highlighted the disparity between the wealthy and the poor, noting that while the rich can profit from bank deposits, those without savings suffer. “The government needs to consider the plight of the poor and provide them with facilities to survive,” he urged.
Qandhari demanded an immediate reduction in interest rates to prevent further industrial closures and avert a deepening economic crisis.
Copyright Business Recorder, 2024
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