ISLAMABAD: Pakistan Association of Large Steel Producers (PALSP) is urgently calling upon the State Bank of Pakistan (SBP) to lower interest rates during the upcoming Monetary Policy meeting, as the steel industry, linchpin of Pakistan’s economy, is at the brink of collapse, with grave consequences for the nation.
Steel industry plays a pivotal role in Pakistan’s economic landscape, providing direct employment to more than 300,000 individuals and acting as a robust support system for numerous downstream industries, directly affecting 7.5 million jobs in various sectors.
However, it now is facing an existential crisis due to an unprecedented liquidity crunch, stemming from the combination of reduced working capital and weakened purchasing power of mills due to colossal increased capital requirements.
This dire situation has already forced the closure of several small to medium-sized steel mills, resulting in significant job losses. If the current sky-high interest rates persist, the steel industry’s sustainability remains in jeopardy, and the impending unemployment crisis will become an issue that both the SBP and the government must address.
At present, the SBP’s key interest rate stands at a staggering 22%, a level not seen since early 2011. This interest rate is the highest in comparison to other countries, rendering Pakistan’s domestic steel industry uncompetitive and unsustainable.
Shockingly, while the central bank’s interest rate for industries in Pakistan is a record high of 22%, it pales in comparison to rates in neighbouring countries, such as 6.5% in India, 3.45% in China, 6.5% in Bangladesh, 2.5% in Thailand, 6% in Indonesia, 3.65% in Vietnam, 10% in Sri Lanka, 1.875% in Taiwan, and 3% in Malaysia.
The harsh reality of exorbitant interest rates has made it nearly impossible for the steel industry to access credit from financial institutions, halting planned expansions and discouraging steel manufacturers from diversifying or making further investments. As a result, the once-promising expansion of existing industries has come to a grinding halt.
According to a recent report by JS Global, based on a 12-month forward CPI, real interest rates have turned positive since September 2023 and are expected to experience a significant expansion with the current Policy Rate at 22%. In the absence of negative CPI surprises, the SBP has an opportunity to initiate monetary easing sooner than anticipated.
Looking ahead, the next 12 months’ CPI averages at 19%, reflecting a positive real effective interest rate of 300 basis points. By January 2024, the 12-month forward CPI shows a 7.25 basis point positive real interest rate. In light of these developments, the SBP must consider a substantial interest rate reduction of 500 basis points in the upcoming Monetary Policy Committee (MPC) meeting.
Wajid Bukhari, Secretary General of PALSP, underlined the urgency of the situation, stating, “Due to high interest rates, government of Pakistan’s debt servicing has shot up to Rs7.6 trillion, consuming majority of the net income of the federal government.
These rates just don’t make sense and SBP must act urgently to aid in creating fiscal space for the government to do infrastructure projects that are direly needed after the record flooding witnessed in Pakistan.
The government must realise the gravity of the crisis and implement immediate measures to support businesses and encourage investment in the country. Implementing business-friendly policies is not merely about preserving jobs in the steel industry, it is essential for the overall economic well-being of Pakistan.
The health of the steel industry has a direct impact on the broader economy. Our policymakers must focus on creating an enabling environment and formulating long-term policies to foster our local industries.”
PALSP’s urgent appeal to the SBP is a call for immediate action to lower interest rates. It’s not just about saving the steel industry; it’s about safeguarding the nation’s economic backbone and ensuring a brighter future for Pakistan. The time for action is now, and the government must heed this call to support the industry and secure the prosperity of the nation.
Copyright Business Recorder, 2023