New interest rate needs to be handled carefully
October 14, 2011
Keeping in view such inherent economic weaknesses of the Federation, as Financial weaknesses, dangers the National economy faced, U$ 1.1billion decrease in foreign reserves, petroleum import payments, decrease in remittances from abroad, and devaluation of rupee by 1.7% against U$ in the first semester, the State Bank of Pakistan has announced a 1.5% decrease (150 base points) in interest rate, bringing it at 12%. However many analysts believe that State Bank rather did this in face of continuous decrease in inflation for second consecutive month, It is pertinent to note that inflation, which was 11.50% during August had decreased to 10.50% in September. Former finance advisor Salman Shah contends that inflation had decreased due to the new formula, and has also informed that the new interest rate would remain ineffective if the government continued its addictive trend of borrowing from banking sector. This would shrink private sector. According to his logic, the government had long before indicated the possibility of decrease of interest rate, but said that considering the effect it had on decreasing inflation, it was a good omen.
He also contends that this should also raise the growth rate, but it should also entail ending of the addiction to loans of government from State Bank, enabling a breather to private sector for better access to loans; as more lending by private sector would prove to be more beneficial to economy. Strict monetary policy had virtually ended any growth rate, and more care, prudence and ground reality would have to be observed, before endeavoring any new decisions.
In its new monetary policy report, State Bank has warned that continuous official addiction to loans and increase in energy tariffs would weaken any resolve / roadmap to controlling inflation. Private sector’s investment and growth should be much more encouraged for strengthening of economy, and besides it has also been hinted that there was a healthy margin for increase in interest rate. The report also lists, energy crisis, law and order situation, and not forgetting recent intermittent floods in Sindh, for hurting the economy of Nation. All these negative occurring are bound to affect Nation’s annual GDP targets. Global depression is yet another factor which has contributed to hurting Pakistan’s already ailing economy, especially countries that were major export markets for Pakistan. In these circumstances, it has become difficult to maintain balance between inflation, and growth just through agro-based policies. State Bank has announced to monitor the sectors of financial sectors and remittances from abroad, closely in order to gain a better insight into possible dangers to National economy. According to State Bank 12% target goal, over average inflation as compared to consumer index for FY2012, is not difficult to attain; however 9.5% target for FY-2013 and 8% target for FY-2014 are difficult to attain. The chief reasons for this can be attributed to official addiction to loans, devaluation of Rupee against U$, and possible raise in energy tariffs. Interim statistics of State Bank maintain that as of 30th Sep, the payable amount of this loan, on basis of cash has decreased to Rs.1051 billion, and quite below the marginalized amount of Rs.1155 billion barrier for FY-2012. If this positive trend persists it would portend good for future inflationary trends.
The time for government to declare its virtual circular debts, as accrued by its various departments and its claims regarding agro-generated revenues has arrived. About Rs.400 billion worth of official securities have been issued in this regard, and should help alleviate problems being faced in energy sector. This should also help regenerate productivity to its maximum, and would also help resumption of blocked resources of private banking and financial sector, and which can be further employed in more productivity. The speedier the process of shedding off the load of official loans in these sectors, the more helpful would this be in containing inflation, as it would diminish the existing difference between existing demand/supply factors.
Although the monetary policy of State Bank released on 08th Oct 2011 is continuously highlighting the failed monetary policy of incumbents, but the rulers remain blissfully indifferent to the situation; although government should have long paid attention towards such negative trends like its addiction to loans, energy crisis, law and order situation, financial weaknesses, and decreasing remittances from abroad, as State Bank is only authorized to pinpoint the weaknesses, alongwith advising how to redress the situation; while implementation lies solely with government. State Bank has pleasantly confounded traders’ community, businessmen, analysists et all with its new interests rates, decreased beyond expectations at 1.5%, it amounts to an overall of 2% decrease. This is also the first milestone of monetary policy, ever since termination of IMF loans. A dumbfounded international media has said that no economist was expecting such liberal measure by State Bank, which announced the decision on 08th Oct. Many analysts were thinking of a decrease of 1% and 50 base points.
However after decrease of 2% in inflation within past three months had left ample room for this new rate; after whose implementation Pakistan ranks among surfacing economies of Russia, Brazil etc, who have decreased their interests rates. This is expected to elevate Pakistan’s decreasing economy, as the growth rate of federation is way below other neighboring and regional entities like India, Bangladesh etc. The only problem that can hinder any progress in all this mechanism is the constant devaluation of rupee against U$.
All efforts would have to be undertaken for the growth support of National economy, and this softening of monetary policy would help agro sector to no limits.
The National business sand industrial community has welcomed this endeavor of State Bank, declaring that this would augur well for the economy of the Country, and also help alleviate productivity costs. The former vice president of FCCI (federal Chamber of Commerce and Industries), Zubair Tufail urges in favor of a lower rate of 5%, yet he was still happy at this 1.5% rate. Former president FCCI and vice president SAARC Chamber of Commerce, Iftikhar Ali Malik has said that this would encourage exports and availability of cheaper loans for government from banking sector.