Business community leader says 150bps rate cut ‘too little, too late’

KARACHI: Business and industrial community has termed the meagre reduction in interest rate a bit disappointing and urged the State Bank of Pakistan (SBP) to keep reducing policy rate to reach single digit.

Atif Ikram Sheikh, President FPCCI, has said that the policy rate cut announced today is too little, too late, as the business, industry and trade community was expecting higher and more substantive cut in the key policy rate of SBP vis-à-vis decline in core inflation. It is pertinent to note that core inflation has come down to 11.8 percent in May 2024; which is the lowest in the 30-month period, he added.

FPCCI President made it clear that interest rate should come down to 15 percent to enable Pakistani exporters compete in the regional and international export markets through reducing the cost of capital substantially.

This step should be accompanied with the fulfilment of government’s promise to rationalise electricity tariff for the industry, he added.

Atif Ikram Sheikh maintained consumer prices are categorically showing a declining trend as they fell by 3.2 percent in May 2024 compared to a decrease of 0.4 percent in April 2024 as per Pakistan Bureau of Statistics (PBS).

It is now overdue to provide respite to the business community in their access to finance from commercial banks through effectively and appropriately cutting the key policy rate, he added.

FPCCI, as the apex trade & industry body of Pakistan, has questioned the seriousness of government, on behalf of the entire business, industry and trade community of Pakistan, in bringing transparency & consultation in the economic policymaking; and, has reiterated its stance that the government should provide answers to the two sets of questions for businesses to plan their year ahead: (i) what are the measures that are being undertaken to obtain the new IMF program and how would they affect cost of doing business in Pakistan (ii) what steps will be taken after the signing of IMF program to stabilize the economy and how & when the government plans to take the business community into confidence on these measures.

FPCCI Chief proposed that to promote price stability, FPPCI emphasises that the SBP needs to break the inflation rate into cost-pushed and demand-pulled.

It is recommended that the SBP should target core inflation; non-food non-energy (NFNE); for operational guidance. The SBP needs to strip out volatile changes in particular prices to distinguish inflation from temporary fluctuations in inflation.

Efforts need to be made to control price manipulation and hoardings in liaison with the respective federal and provincial government departments. An active and efficient Competitive Commission of Pakistan (CCP) and effective price control mechanisms also need to play their due role.

Saquib Fayyaz Magoon, SVP FPCCI, said that SBP should focus on core inflation rather than general inflation on an immediate basis as these exclude the most volatile components of the basket. The government must ensure the effectiveness of price control measures through vigilant actions against hoarding and malpractices.

Magoon explained that despite the progressive and major hikes in the policy rates from 9.75 percent to 22 percent over a period 6 quarters in 2022 and 2023, general inflation remained stubbornly-high and didn’t respond to the policy rate.

He stressed that despite the successful completion of IMF Stand-by Agreement (IMF-SBA) and 22 percent policy rate, Pakistan remains overwhelmed with issues dwindling exports and economic instability. This phenomenon well-establishes the fact that the government needs to employ other policy tools to tame the economic volatility.

However, President Karachi Chamber of Commerce & Industry (KCCI) Iftikhar Ahmed Sheikh stated that keeping in view the descending inflationary trends, the business community was expecting a substantial reduction of at least 4 to 5 percent but a meagre reduction of 1.5 percent has been announced which was a bit disappointing.

“However, as the SBP has decided to ease monetary policy by 150 basis points, we hope that this approach continues in the days to come to gradually bring down the interest rate to single digit”, he said, adding that lower interest rate in line with the international trends would certainly encourage borrowings by the private sector that would prove favorable for the economy by encouraging business expansion as well as industrialization.

He was of the view that although the inflation has drastically come down to slightly above 11 percent, after touching 38 percent but the ease in inflation was not because of SBP’s tight monetary policy stance. “It can purely be attributed to the administrative measures taken by the government along with improved agricultural production as well as reduction in Petroleum price”, he added while referring to excellent production of wheat, rice, sugar cane, cotton and maize, etc.

He stated that stability in rupee value was also one of the major reasons for easing the inflation as it was a well-known fact that huge quantities of commodities were regularly being imported in Pakistan, hence, devaluation of rupee directly triggers the inflation.

The crackdown initiated to deal with black-marketing and illegal sale/ purchase of dollars and its smuggling outside Pakistan also resulted in bringing stability to Pak rupee and subsequently eased the inflation.

Sheikh, while terming it as first step in the right direction, hoped to see further reduction in interest rate which would be widely welcomed by the entire business community of the country that has been badly hit due to exorbitantly high cost of doing business.

However, President of the Korangi Association of Trade and Industry (KATI), Johar Qandhari has warmly welcomed the State Bank of Pakistan’s decision to reduce the interest rate by 1.5%. He highlighted that the business community had long advocated for a reduction in the interest rate, which had been among the highest in the region.

This high rate contributed to inflation and created capital shortages for industrialists, making it difficult for businesses to secure affordable loans.

Qandhari pointed out that the inflation rate has significantly decreased from 33% to 11%, creating an opportunity for a more substantial reduction in the interest rate. While he appreciated the 1.5% cut, he emphasised that it is insufficient.

He urged the State Bank to bring the policy rate into single digits to promote industrialization, which would, in turn, boost job creation.

“The high-interest rates have slowed economic growth,” Qandhari noted. “A significant reduction in the policy rate can accelerate economic growth.”

He also acknowledged the Federal Board of Revenue (FBR) for achieving a 33% increase in revenue collection, describing it as a commendable development that could enhance government revenue and enable the provision of relief to the public.

Expressing optimism for the future, Qandhari hoped that the government would offer relief in the upcoming budget to alleviate the economic pressures on the populace. “Providing relief in the budget will allow people to breathe a sigh of relief after enduring an economic crisis for the past few years,” he said.

However, Site Association of Industry (SAI) President, Muhammad Kamran Arbi, expressed disappointment on cutting the interest just by 1.5%. He called the move as “insufficient to address the challenges faced by the industrial sector”.

Arbi highlighted that SITE Association of Industry had submitted budget proposals to the State Bank, advocating for a policy rate reduction to 13-14 percent.

This, he argued, would alleviate capital shortages stemming from the escalating costs of operating industries.

SAI president further emphasized that the central bank should establish a roadmap for reducing interest rates, outlining measures aimed at alleviating the capital shortage faced by industries.

If such a roadmap exists, he urged the industrialist community to be informed, as this would facilitate the implementation of mutually beneficial economic and business-friendly measures through collaborative consultation.

Arbi said that we are hopeful that measures like the recent reduction in interest rates will continue in the next monetary policy and the State Bank will seriously consider our proposal and bring the interest rate down to 13-14%. Because the rate of inflation is gradually decreasing in the country, it needs to be taken into account so that the people and the business and industrial community can get relief, he said.

Copyright Business Recorder, 2024