Financial institutions have warned that Pakistan's high rate of inflation may eat into the country's 'robust' economic growth. Inflation is at its highest since 1997.

KHALIL AHMED, Senior Correspondent
Dec 04 - Dec 10, 2006

Looking at the global scenario, one comes to know that the hike in the interest rates across the world is particularly due to three major reasons: ever-increasing energy prices; rising housing prices in many countries; and skyrocketing food prices. Hike in the interest rates has been announced by the USA, Japan, the European Central Bank, the UK, Australia, India, South Korea etc. and the basic reason given by all of the mentioned names is inflation concerns.

To curb this trend of inflation, many countries in the world have taken precautionary measures. Inflation at present has become a global phenomenon and the basic reason behind the rise in the interest rates is to combat inflation. However, the question is: Could inflation be pushed down without affecting the economic growth of a country? It is widely believed that to bring about economic growth, one of the steps is to encourage consumer spending and discourage savers. And this is viable when the borrowing rates are slashed to facilitate the consumers. This is witnessed in the western world, however, spree in the consumer spending at times fuels inflation as well. There are countries in the world including Japan, the second biggest economy of the world, where interest rates were slashed to end economic stagnation.

Pakistan is one of the countries which experienced lower interest rates particularly from 2001 to 2005. The years 2003-2004 experienced the lowest ever interest rates in the country. The decline in the interest rates undoubtedly brought about consumption culture hence the citizens were encouraged to borrow from the financial institutions. This brought about economic growth particularly leading the country as the second highest growing economy in Asia after China in the year 2004-05 when the Pakistani economy grew at phenomenal rate of 8.6 percent. Earlier in the decade of 90s, the borrowing rates were as high as 20 percent for certain categories and borrowing money from the financial institutions was a difficult job for the ordinary citizens. Lower interest rates generated demand and pushed the prices up and there was rush to buy home appliances, cars, houses etc. High demand in the housing sector helped the housing prices skyrocket and this made the dream of owning house by millions of Pakistanis virtually impossible.

Moreover, the inflationary pressures started showing stronger signs which brought worries to the millions of citizens. According to an international source, International Monetary Fund officials said, "Financial institutions have warned that Pakistan's high rate of inflation may eat into the country's 'robust' economic growth. Inflation was at its highest since 1997. When inflation became talk of the town, the concerned authorities thought of doing something to tackle the situation. One of the things done in this regard was to increase the interest rates and encourage savers. It was revealed by a source in July this year that Pakistan announced a surprise interest rate increase. The State Bank of Pakistan said that its main borrowing cost will rise to 9.5% from 9%. It is the first time interest rates have risen in 15 months. Pakistan is South Asia's second-largest economy and its rapid rate of growth, coupled with high energy prices, is proving a concern for many observers. The central bank wants to slow the annual inflation rate to 6.5% in the year running to 30 June, 2007.

In the previous 12 months, it was 7.9%. Analysts said that the higher interest rates were unlikely to slow the economy and they remained confident that Pakistan would still hit its growth target of 7% for the current fiscal year. At present, inflation measured by CPI stands at 8.1 percent and core inflation (non-food non-oil) is below 6 percent. Major contributors to inflation are oil and food prices. Food inflation in running in double digits and oil prices are still a problem for our country. The borrowing rates have been pushed up and the depositors are being encouraged with offers by over 10 percent returns on annual basis. This might help in coping with inflationary pressures.

In case the interest rates are increased, the businesses do get affected as their costs increase which make them less competitive in the highly competitive world. Of course, businesses/ manufacturing groups would be disappointed by the decision to increase rates. It is to be noted that it is not only the manufacturing but also the service sector which would see the impact of soaring interest rates. Our country where there is shortage of skilled workers, the service sector could find it tough in terms of input price inflation.

Increase is perhaps meant to cool the housing market and try to slow consumer borrowing which would result in sluggish sales. When asked, one of the bankers revealed that at present car financing rates range between 14 and 16 percent against less than 8 percent a couple of years ago and the rates offered vary from customer to customer. He was of the view that the demand is registering a downward trend and the people have become somewhat cautious. When asked about house financing, he revealed that in 2003-2004 house financing was available at around 7% however at present it has almost doubled and again it varies from customer to customer. He further told that the financing for the salaried people was available at comparatively lower rates as compared to the non-salaried category.

It is always good to offer loans to the manufacturing and service sectors at reasonably lower rates to encourage economic activity, to curb poverty and to generate more employment opportunities for the citizens. Textile exports are vital for Pakistan's economy as the sector contributes more than 60% to the total exports of our country by generating around $10 billion per annum. The decrease in textile exports is because the sector has become less competitive owing to rising input cost.

Let's look at the global scenario of past and present in terms of the interest rates. It was way back in 1998 when Brazil announced a sharp cut in interest rates to try to counter-act signs of an economic slowdown and rising unemployment. Japan, the second-biggest economy of the world, having experienced depressed growth slashed its interest rates to virtually zero in an effort to boost spending and reduce the incentive to save. At present, its economy is emerging from a decade of stagnation. However, recently the Bank of Japan raised its key interest rate from 0% to 0.25% which is first increase in six years. The Bank of England has increased interest rates to a five-year high to 5% because of inflation concerns. Inflation is currently running at 2.4% which is more than the UK government's 2% target. The European Central Bank has increased the rates to 3%. Euro zone interest rates may be increased to 3.5% during the current year. Inflation in the Euro zone stands at 2.5%. The Reserve Bank of Australia has raised the borrowing rates to 6%, a six-year high, as the inflation has soared to 4% particularly due to higher oil and fruit prices. The United States has raised rates to 5.25%. The Reserve Bank of India in July increased its short-term interest rate to 6%. The increase in rates was for the third time in four months due to inflationary pressures. The Bank of Korea, South Korea's central bank, raised interest rates to 3.5% in October last year for the first time in more than three years to combat inflation. Inflation in Asia's fourth-largest economy stands at 3%.

Increase in the interest rates at present in Pakistan is the need of the hour, however, it is to be seen that this increase does not impact the targeted growth of 7% during the current fiscal year. The manufacturing and service sectors should be offered incentives to borrow money at lower rates for sustainable economic activities in the country.

It is obvious that the rise in rates is being welcomed by savers and is not good news for borrowers, particularly for those borrowers who will see their monthly repayments rise.


The six-day training program on "Risk Management & Card Marketing", specially organized for the bankers from Urumqi City Commercial Bank (UCCB), China, by Habib Bank's Management Development Institute, recently ended successfully. This was the second batch of trainees who were imparted comprehensive banking knowledge and risk management expertise during the last six months.

In an effort to ensure success of this training program, the senior management of Habib Bank extended full support and shared their vast experience and knowledge with the participants on different occasions. At the inaugural ceremony of the training session, Zafar Aziz Osmani, SEVP, MMC & GE HR & OD of Habib Bank, expressed his confidence over the growing economic cooperation and support among not only the two brotherly countries Pakistan & China - but also between the financial co-partners in Chinese market i.e. UCCB & Habib Bank.

In addition, the President & CEO of Habib Bank Mr. Zakir Mahmood, thanked the UCCB management on selecting Habib Bank for getting its people trained. He referred to the MoU that was signed in February 2006 between UCCB and Habib Bank Limited during the visit of President Pervez Musharraf to Beijing as a progressive move that will play a positive role for the banking industry. He offered Habib Bank's full-fledged support for the enhancement of economic and trade relations. Moreover, further emphasizing on the history of Pak-China relationship, he discussed various areas in which the two countries have extended co-operation and lauded the efforts of Divisional, Head Management & Organizational Development Division and his team for developing such an excellent training program.

Upon successful completion of the training program, a formal dinner was hosted by Zafar Aziz Osmani in honor of the Chinese delegates. The event was attended by the bank's Chairman Mr. Sultan Ali Allana, all members of Managing Committee, senior members of Human Resource and Organization Development Group, faculty members as well as the staff of Management Development Institute, Karachi. The Chairman presented mementos to the members of the delegation and expressed his satisfaction over the successful progress of the training program. He further expresses hope that the cooperation among the two banks will continue to grow in the years to come. Presently the group is visiting Lahore & Islamabad.