PBC recommends reduction in policy rate to 7 percent

Pakistan Business Council (PBC) has recommended further reduction in the Policy Rate from the current 11 percent to 7 percent in order to boost economic activities in the backdrop of ailing economy because of the COVID-19 pandemic.

In its latest report 'COVID-19 Crisis: Business Response & How to Sustain Employment in Pakistan' issued here on Thursday, the business advocacy body has highlighted the role that business is playing to help alleviate the impact of the COVID-19 crisis and outlined the way forward to sustain employment.

PBC has recommended reduction in policy rate based on some key reasons i.e of the March CPI of 10.2 percent, the non-cost push inflation amounted to just 5.2 percent.

It said Policy Rate is not an appropriate tool to address supply side issues affecting availability and price of agricultural produce. Hence 11 percent Policy Rate is neither the right medicine nor the correct dose.

Pakistan's economy was already stressed before the coronavirus crisis. As part of the IMF programme, the country had committed to stretching macroeconomic targets, some, it appears, were unlikely to be achieved even before the onslaught of the corona crisis. In these circumstances, the government's ability to offer large cash handouts is limited.

It said with the lockdown and depressed economic conditions, the inflation outlook is lower than 5 percent. The rationale for holding borrowers - government and the private sector - hostage to high rates to sustain carry deposits no longer exists. Foremost, the country cannot afford high borrowing costs.

It said that responsible businesses that belong to the PBC (and those that don't) recognize the need to put "people before profit" and will continue to nurture employment for as long as they can. However, COVID-19 is an unprecedented crisis and no one can forecast its economic impact with much accuracy.

The PBC advocates that instead of incremental steps with diminishing effectiveness, a proactive and holistic approach should be adopted to strengthen the basis of the private sector's ability to continue to sustain jobs, in time promote value-added exports and enhance import substitution.

These are the objectives of the PBC's "Make-in-Pakistan" thrust. A positive outcome of the Covid-19 crisis is a renewed recognition of the importance of a large 210 Mn + domestic market and a reaffirmation of the potential of the agricultural sector.

Another positive is the confirmation of the role of well organized, adequately resourced, law-abiding and fully documented sector. Hence, the need to shape policies that promote the growth of the formal sector.

A key action taken by PBC members to ensure continued supplies is to create liquidity within their supply chains. PBC members, who are the largest businesses in the country and come from 15 sectors of the economy, recognized that they have to continue acting responsibly towards their employees, to their immediate communities and to their country.

Paying and caring for one's own employees - both management and workers - is a business necessity, not a virtue. Sustaining livelihoods and dealing with health risks ensures that the talent base remains intact, thus ensuring that businesses get off to a good start when conditions improve. So would the country's economy and tax revenues.

To fund salaries for workers when cash inflow is constrained in a lockdown, senior managements in many PBC members volunteered to take pay cuts. Those engaged in essential industries like health, hygiene and food that could continue to operate, incentivized their field forces and provided liquidity to the supply chain to ensure that their health and nutrition products reach far-flung areas.

Others went out of the way to discharge the pay distribution process to thousands of employees in a safe and responsible manner. Besides rewarding and caring for their own employees, PBC member companies demonstrated responsibility by going the extra mile to help the communities they are part of and beyond in the country.

PBC members provided hygiene kits, food rations and used part of their advertising budgets to develop awareness messages. Others provided face masks, gowns, face shields, disinfection chambers, meals for healthcare workers and even engaged in developing parts for ventilators.

The aggregate financial commitment of PBC members to alleviating the impact of the coronavirus crisis is already beyond Rs5 billion. Two weeks through the lockdown, it is uncertain how long and severe the economic disruption will be. PBC members represent the crème de la crème of Pakistan's business sector.

However, together they account for only 20 percent of the 10.6 million people in formal employment in the country.

The SMEs, which are not as well-resourced, employ the overwhelming 80 percent of the formal workforce. Moreover, the majority - 38 million of non-agriculture workers - are in the informal sector, which is likely to be impacted the most.

Even for strong businesses, there are limits to the extent and time they can continue to fund payrolls and meet other fixed costs if they remain shut and their cash flow is constrained.

In this background and to ensure that stakeholders plan proactively to secure employment, sustain economic activity and establish a sounder basis of reviving tax revenues, PBC recommended a business relief programme.

A third of the "asks" [in the Business Relief Programme] are for deferral and half are for one-time remission of taxes and levies to create the liquidity and the means to sustain the livelihoods of lower-paid employees.

Eight percent are to promote investment and manufacturing. These suggestions were justifiable even before the coronavirus crisis but become more relevant now.

The remainder 12 percent seeks release of refunds and waiver of demurrage, which the government has already agreed to do. The package sought no large handouts and recognized the responsibility of business to sustain employment, in line with the government's objectives.

The package is also drawn in the belief that the IMF and other multilaterals will look at Pakistan in a more accommodating manner now than earlier.