INTEREST RATE INCREASE LEAVING NEGATIVE IMPACT ON ECONOMY

RISE AT ODD WITH GLOBAL FINANCIAL MARKET

KANWAL SALEEM
Feb 25 - Mar 02, 2008

LAHORE: With increase in the interest rate, trade deficit has not only increased but there must have been negative effects on the country's economy. The interest rates were being slashed at the global level, but in Pakistan, the situation was totally opposite meaning thereby the policy-makers have different perceptions about international trends. The government intention behind increasing the interest rate was that to control increasing inflation in the country, but the decision will ultimately affect the whole production process.

According to local businessmen, the government has increased the interest rate instead of strengthening the supply chain to control inflation. This will ultimately affect the whole production process. "It is a sorry state of affairs that at a time when the entire industry is already suffering due to the high cost of doing business, making it uncompetitive in the global market, they said.

They were of the view that imbalances in the economy such as increasing trade deficit, current account deficit, high saving and investment gap, huge government borrowing and persistent inflation including inflation of food items-all this will have a very negative impact on the national economy. If the government is serious to promote local industry, it would need to review the monetary policy keeping in view the ground realities, they insisted.

Pakistan Industrial and Traders Association Front (PIAF) Chairman Mian Abuzar Shad told PAGE that rise in the interest rates was great injustice with the business community because it had not only increased the trade deficit but also created manifold problems for the textile sector. He said interest rate should not in double digit for the survival of the industry. He said the increase in interest rate would hurt the economic growth.

Moreover, the Ministry of Finance has yet to calculate the impact of new monetary policy on federal government's borrowing, but analysts believe that the central bank may not be able to serve the purpose through tight measures. However, the announcement of coordination-lacked monetary policy announced by State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar on January 31, had sent shocking wave not only to the economic managers in Islamabad, but also to business community throughout the country.

According to analysts, interest rates were being slashed at the global level, but in Pakistan, the situation was totally opposite, which means the policy-makers have different perceptions about international trends.

While announcing the monetary policy, the SBP may have the perception that increase in interest rate would discourage the private sector despite having the knowledge credit to the private sector was already behind the target, an analysts said.