‘Rise in interest rates to bring another storm of inflation’

09 Apr, 2022

LAHORE: Traders and industrialists on Friday expressed concern over the rise in interest rates by State Bank of Pakistan (SBP), saying that in the current scenario the rise in interest rates would bring another storm of inflation. Due to high gas, electricity and other tariffs, manufacturers are facing difficulties in meeting external orders.

The Lahore Chamber of Commerce and Industry (LCCI) expressed its dismay over hefty increase of 2.5 percent raise in mark-up rate, saying that in the present economic scenario, the business community was expecting a cut but the SBP has further increased it.

LCCI President Mian Nauman Kabir said that 2.5 percent increase would hit all sectors of economy hard. The SBP should withdraw massive hike in mark-up rates and bring it to single digit to encourage new investments, for revival of businesses and to give a jumpstart to the economy which is at standstill.

He said the increase in mark-up rate would have dire consequences on economic growth rate. It will surely hinder the process of industrialisation and private sector growth. Pakistan should bring its mark-up rate at par with the regional rates which are much lower.

Mian Nauman Kabir said that being the premier business support organisation of the country, LCCI was of the view that the monetary policy of the country should support industrialisation. Unfortunately in the past, the successive governments used the policy of increasing interest rates to control inflation. This policy failed miserably. Instead of curbing inflation, this policy of increasing the interest rates resulted in rapid de-industrialization in the country, resulting in negative GDP growth rates.

“The mark-up rate of 12.25 percent prevailing in Pakistan is considerably higher than other economies in the region (India four percent, Bangladesh 4.75 percent, China 3.7 percent and Sri Lanka 5 percent). This essentially means that access to finance which is imperative for the growth of industry is already more expensive in Pakistan as compared to other economies in the region. It is worth mentioning that the credit availability to private sector in Pakistan is currently only 17 percent of GDP which is also the lowest in the region,” the LCCI President added.

He said that since the government was the biggest borrower in Pakistan, any increase in interest rate also increases the borrowing cost of the government, resulting in worsening of fiscal deficit. The fiscal deficit in Pakistan is already in excess of eight percent of GDP.

He said high mark-up rate was one of the biggest reasons of high input cost of the industrial sector. Resultantly, Pakistani merchandise facing hard competition in the international market.

Mian Nauman Kabir said it was very unfortunate that tighter monetary policy stance adopted by the SBP was doing no service to the trade, industry and economy.

The LCCI President said that high mark-up rate was no more sustainable. It has been causing a great harm to economy and would continue to do so unless and until a realist approach is adopted.

The LCCI President said that despite higher inflation all the major economies had either curtailed or were in the process of reducing high interest rates to protect their economies while countries like Japan, Switzerland and Denmark were maintaining mark-up rate under zero.

LCCI Senior Vice President Mian Rehman Aziz Chan and Vice President Haris Ateeq said that “we have to move forward quickly, as like as other countries of the region, to make the country a hub of manufacturing activities and a heaven for investors.”

The LCCI office-bearers urged the SBP to bring down the mark up rate in line with regional economies.

Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA) firmly rejected the massive increase in the mark-up rate for financing under Export Finance Scheme (EFS) by 2.5 percent following the abrupt change in key policy rate announced in the MPC meeting by the Central Bank, stressing the cost of industrial production would handicap the country’s export sector further.

PRGMEA North Zone Chairman Sheikh Luqman Amin observed that the cost of doing business, which was already up due to the volatile exchange rate, would further come under pressure. He said it was quite unfortunate for the export industry, as the value-added textile exporters were unable to understand how they would run the businesses with this high policy rate and the dollar at 190. He termed the rate hike as devastating that would adversely impact the industry and export sector and render industrial workers jobless.

According to reports, the SBP has announced to increase in the mark-up rate for financing under EFS by 2.5 percent. The Monetary Policy Committee of the SBP in its emergency meeting decided to raise the policy rate by 250 basis points to 12.25 percent due to multiple risks to the economy. Accordingly, the SBP has decided to increase the mark-up rate for financing under EFS by 2.5 percent in line with the increase in policy rate announced in the MPC meeting. Accordingly, the mark-up for EFS (both Part I and Part II) will be 5.5 percent p.a. with effect from April 8, 2022 till further instructions.

Sheikh Luqman called this move unwise as it came at a time when the economy was deteriorating at an unprecedented rate. He said it would not be possible for the businesses to operate in such a high interest rate environment.

He foresaw huge adverse impacts on the economic growth, which was already fragile, while rupee devaluation and high inflation were hurdles in the way of export industry expansion.

The PRGMEA Zonal chairman termed the policy announcement a blast for the value-added apparel industry, saying it would add to more economic crises amid rupee devaluation and political uncertainty.

He said that the policy announcement has two objectives; arrest inflation and put a stop to the roaring dollar. But, it would negatively impact all businesses, especially those which are export and import base, he feared.

Sheikh Luqman Amin said the business community had been opposing the autonomy of SBP because of fears it would make it a pawn of the International Monetary Fund and now it had been proven.

This move would only rub more salt into the wounds of the export industry that has been losing its profit margins and competitiveness in overseas markets to high cost of raw materials, energy, and other inputs.

He also criticized the SBP’s role in not taking any effective steps to control the rupee’s decline against the dollar and instead of coming up with a highly unexpected decision of raising the policy rate in an uncertain political and business environment.

He believed that the country was already undergoing a fragile political crisis and increase in interest rate would further cast gloom on the already ailing economy marred by the losing strength of the rupee against the dollar.

The Pakistan Industrial & Traders Associations Front (PIAF), while flaying the huge jump of 2.25 percent in key policy rate by the central bank, has appealed the SBP to review its tight monetary policy stance as it will hamper the production and thwart the economic growth of the country.

PIAF senior vice chairman Nasir Hameed and vice chairman Javed Siddiqi, in a joint statement, baulked at a 225 basis points (bps) hike in the policy rate, terming it a negative development that would further burden the industry.

The SBP jacked up the policy rate to 12.25 percent in a bid to thwart inflation and balance of payment risks. Reacting to this higher-than-hoped monetary tightening, the PIAF leadership termed it a negative development which would further burden the industry in the wake of high cost of business and prices of inputs.

Nasir Hameed said the growth in large-scale manufacturing industries was already nominal in the first quarter of current fiscal year, as the industries were poised to face the impact of high input prices and shortage of energy, while further hike in mark-up rate is another threat for them.

Javed Siddiqi said that high interest rates in low growth environment would create bad debts in the private sector squeezing fiscal space for development. He said the current high monetary policy would depress the domestic demand and retard the economic progress. He said the current monetary policy would also stifle capital formation both in the public and the private sectors.

Copyright Business Recorder, 2022

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