The SBP Policy Rate set by Monetary Policy Committee MPC-SBP at staggering 12.25% needs re-definition and aligning it with our competing economies. The Policy Rate is the root for all forms of Interest Rates and Lending, such as KIBOR (12.68%), Repo, PIB, T-Bills, house building loan, agri loans down to credit card charges. This is similar to US Federal Open Market Committee (FOMC) setting Federal Funds Rate (FFR=2.5%) thereof comes the Prime Rate (5%), mortgages, car leasing/financing, students loan down to credit card charges. Our competing countries have Repo Ceiling/Floor at 6% & 4.75% and Policy Repo at 6.25% compared to Pakistan, which stands at 11.25%. Thus making Pakistan expensive for business.
It may be noted that increasing the Policy Rate will neither reduce inflation nor make Pak Rs healthier, rather it will further weaken the economy and raise inflation because supply is reducing. In the developed economies consumerism is the main cause of inflation, where demand of people is higher in terms of credit cards, cars leasing, house renovations, vacations, student loans etc. However, in case of Pakistan dwindling supplies is the main reason for inflation. Pakistan inflation is poles apart from that of US/UK/Euro where Prime Rate/Interest Rate is used to fight consumer/demand inflation. Pakistan cannot use the same weapon to fight supply-driven inflation. Most of our economists placed at high pedestals are western-educated, they simply yet wrongly believe that increasing Interest Rates will decrease inflation, which is not the case. Pakistan and western economies are poles apart. By increasing the Interest Rate, we would seriously jeopardize our industrial/infrastructure/agricultural growth, needless to say the inflation will continue to rise. As per SBP-MPC Report of 29-March-2019 the industrial sector (Large Scale Manufacturing LSM) declined by 2.3% compared to 7.2% last year same timeframe (Jul-Jan), where the root cause seems to be high Policy Rate/KIBOR/Repo. SBP issues a two-page Monetary Policy Statement without full minutes an dissent of some of the members; contrary to our SBP other central banks, such as BD issues a 17-page detail analysis and India Reserve Bank issues complete justification, including dissents on why some members of the Board decide otherwise. We should also know the details of the discussion that took place in SBP and who are the members of the Monetary Policy Committee and why they thought it should go up. SBP need to give us the last few times when the Policy Rate was increased, how many points did the inflation go down?. A simple two-page by SBP is not enough. The Ministry of Finance which makes policy for SBP needs to form a committee to devise a framework to satisfy the 220 million that up/down Policy Rate was in their best interest.
US/UK/Euro SBP equivalent Policy Rates have been 0.5 to 3% but the consumer credit rates are 18 to 22%. Thus, their industrialization continues to increase the supply yet the consumers pay high interest rate to control the demand and inflation from overheating.
Recommendations: I suggest as a humble student of economics that SBP do the following to rejuvenate the industrial, transportation, infrastructure and agriculture sectors:
- Decrease the SBP Policy Rate to 4%,
- Repo, KIBOR etc. (Policy Rate +1 to 2%) will follow suit, (primarily for LMM Capital plant, equipment, machinery, Working Capital),
- Repo, KIBOR etc. (Policy Rate +4 to 6%) will follow suit, (primarily for Imported Capital plant, equipment, machinery, Working Capital),
- House Building KIBOR plus 3%,
- Agriculture Lending Rate (Policy Rate + 2%),
- Car leasing KIBOR plus 6% for imported and KIBOR plus 3% for LMC,
- Consumer credit card rate may not be less than 18%.
Although SBP confusing Circulars exists for Locally Manufactured Machinery (LMM), where the interest/lending rates are lower but these Circulars are ineffective as these are for Re-financing and not owned by the banks. Inversely, SBP needs to make the Policy Rate 4% and issue a Circular for consumer credit cards, house financing over Rs 2 million and financing of luxury cars, double cabins, 4x, 1301 CC or above.
Neither the greenfield nor the brownfield Feasibilities, under the present lending regime are not financially viable. Similar projects in competing countries, due to much lower borrowing rates are viable. Thus, there may be capital flight out of Pakistan and FDI hesitant to come to Pakistan. Lowering the SBP Policy Rate will stop capital being flown out of Pakistan and facilitate FDI, thus would increase much needed industrialization.
Keeping SBP Policy Rate high is causing free fall of Pak Rs. and destabilization of the economy.