The reaction of trade and industry is usually negative whenever the central bank of a country decides to follow a tight monetary policy. Commenting on the latest monetary policy statement (MPS) announced by the State Bank of Pakistan (SBP) on 28th January, 2020 to keep the policy rate unchanged at 13.25 percent per annum, the President of Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Mian Anjum Nisar, expressed serious concern over the policy of the SBP and said that industry cannot survive in a high interest rate environment and compete in the international market. Policy rate of 13.25 percent in Pakistan is the highest in the region compared to 4.15 percent in India, 4.35 percent in China, 8.0 percent in Sri Lanka, 3.0 percent in Malaysia, 1.25 percent in Thailand and 6.5 percent in Indonesia. While the SBP is continuously following a contractionary monetary policy, government is not providing inputs such as energy to the industry at affordable rates. The industry was also facing high cost of doing business in Pakistan due to infrastructure and policy bottlenecks. Continued monetary tightening had constrained private sector cash flows and non-performing loans have increased by more than 23 percent since the monetary policy tightening. Nisar urged the SBP to reduce the policy rate in order to increase demand of private sector credit which would ultimately help in industrialisation and economic growth.
Mian Zahid Hussain, President Pakistan Businessmen and Intellectual Forum (PBIF), added that the SBP had disappointed the business community by keeping interest rates unchanged. While political instability, double-digit inflation, high interest rates, rising prices of energy and increasing tax burden are eroding the confidence of business community, profits of banks are soaring beyond reasonable limits amid an economic slowdown. Monetary policy has failed to tame inflation and economic slowdown will continue to haunt the country if reservations of business community are ignored.
We feel that the reaction of the FPCCI, which is a very powerful and organised lobby of business and industry in the country, is neither unexpected nor surprising. They have always voiced concern and unease whenever the SBP policy rate to tame inflation and reduce current account (C/A) deficit by making the rupee holdings more attractive than investment in other currencies. Another advantage of maintaining high interest rates in the country this time has been an investment of over dollar 2 billion in Treasury Bills (T-Bills) and Pakistan Investment Bonds (PIBs) made by investors mainly form the US and the UK which has not only bolstered foreign exchange reserves of the country but has added liquidity to the economy and served to increase the credit potential of the banks and reduce the interest rates on PIBs and T-Bills, benefitting the government in its debt servicing liability. So far as the claim of the business community that tightening of the policy rate has not helped to tame inflation is concerned, such a claim is totally unfounded and has been rejected all over the world. Policy rate has always been the main instrument of credit control at the disposal of central banks and is used frequently to reduce the growth of money supply and suppress demand in the economy to control inflation. There is no point or space in these columns to discuss this assertion thoroughly but to argue otherwise would be contrary to the obvious and a waste of time. In this newspaper's view, it should be obvious to the FPCCI that the level of inflation in the country due to massive devaluation of the rupee, sharp increase in administered prices like electricity and gas, reduced imports and a low growth rate would have been much higher if the SBP had not taken timely action to hike the policy rate in order to contain inflationary pressures in the economy. In addition, whenever the business community refers to the low interest rates in other countries of the world, they forget the inflation rate in those countries to arrive at the real interest rates which are more important for savings' point of view. Incidentally, to justify its present policy stance, the SBP in its latest monetary policy statement (MPS) has said very clearly that "the MPC noted that the real interest rates on a forward-looking basis were not high compared to other emerging markets and from the perspective of Pakistan's own experience." The FPCCI should feel satisfied by this policy statement and also recognise the fact that members of the Monetary Policy Committee (MPC) are highly qualified to do their job and equally patriotic to look after the interests of all the segments of society, including the ordinary households, who deposit their savings in banks in the hope that the purchasing power of their savings will not be eroded overtime because of lower interest rates.
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