Renowned economist and Ex-vice chancellor of Bahauddin Zakariya University, Dr Karamat Ali has said that the one percent increase in discount rates by the central bank surprised economists, as Pakistan is currently passing through a stagflation phase where inflation is increasing despite an appreciable slowdown in growth.
He pointed out that central banks try to curb consumption by increasing interest rates that inevitably suppresses growth. In Pakistan's case he added the growth is declining while inflation is out of control.
According to Khawaja Muhammad Yousaf, former Chairman of Pakistan Tanners Association (PTA) the growth of both large scale and medium sized industrial sector is on the decline. Pakistan produced fewer cars in fiscal 2007-08 than in 2006-07.
The production of light engineering items like television sets, air conditioners and refrigerator has either declined or stagnated. The country consumed 18 per cent less cotton in 2007-08 than previous year, he added. Yousaf added that there have been a negligible amount of green projects during the past three years. Whatever growth rate was achieved last year, he added, was not due to a high consumption of industrial goods a matter that should concern the State Bank.
Market Analyst Muhammad Younas Ghazi said that Pakistan's economy is not over heated. He felt it is under stress due to various factors and needs a boost from policy makers in the form of incentives that increase production. He said the main factors of inflation are increases in the rates of petroleum products and edible oil as well as an increase in rates of food items both locally and globally.
Ghazi added that no sane planner would seek to reduce food consumption in a country like Pakistan, where malnutrition is a norm. He said the factors that are causing inflation are out of the control of SBP. Increasing mark-up would further malign the lower middle class and the poor he added.
Banker Qamar Azeem said that the monetary policy announced by SBP would further strengthen the balance sheet of banks. He said that the central bank, as a regulator of the financial sector, is bound to protect the interests of all stakeholders in the economy.
He said that every time SBP increases interest rates, the banking spread enlarges. The banker added that depositors are deprived of the benefit of higher mark-ups or are marginally rewarded while the banks are rewarded with high gains.
He said in a situation where credit uptake is not keeping pace with growth, the banks provide better credit terms to big corporations and charges high mark-up from small and medium enterprises. This way, he added, large entrepreneurs go on accumulating wealth while SMEs feel the pinch.
Abdul Sattar, a chartered accountant said that the increase in mark-ups would further increase the cost of production and the cost of imports. He said that banks largely finance imports and a one per cent increase in the mark-up would add to the cost of imports that would be passed on to the end users.
He said SBP would have been justified in increasing the mark-up if it had slowed down luxurious consumption and curbed imports, but added that all indications are that this would not happen.
The richer segments of society, Sattar continued, have the capacity to bear higher prices, adding that they have continued with their import-based consumption despite a sharp decline in the value of the rupee.
The chartered accountant said that when a 12 percent depreciation of the rupee has not curbed their consumption, then a further one percent mark-up would also not have an impact. He warned that cuts in food consumption are on the cards, which would be injurious to the nation in the long run, as it would reduce the productivity of workers.