Jan 26 - Feb 01, 2009

Pakistan and its financial markets have been under serious liquidity crunch since start of CY08 and to thrash the crisis the centre consulted IMF. Under IMF advice it has been increasing interest rates to curb inflation and soften liquidity problems.

Now, while the world is moving towards fighting deepening recession by reducing discount rates and making life easier for investors, manufacturers and buyers Pakistan has been raising the interest rates being obliged under IMF conditions.

SBP has increased discount rates thrice from 10.5% to 15% until the end of the year. There were still rumors that it will further be increased in Jan 09 but Mr. Shaukat Tareen ruled out any such stance as the Government, according to him, has achieved the IMF set targets. The fiscal deficit has been contained at 2% by Dec-08, subsidies have been reduced or removed, tax to GDP is elevated to 10.5% and CPI is reduced to 20% and is on lowering trend.

Are we content with these so called achievements? Are we back on growth track now? These are very touchy questions in the minds of individuals and especially in the minds of financial sector related people.

Actually we have not achieved anything in these 12 months rather we have lost much to be counted. Our financial sector has lost billions of rupees in search of relief from the crisis. Stock market dived to its lowest of 4 years, while investments were hampered due to borrowing rates and back bone of manufacturing sectors shattered. Country has lost millions of exporting dollars and many jobs due to manufacturing slow down.


The effects of discount rate hikes are wide spread as they have pushed KIBOR rates upwards, resulting in increasing borrowing costs, higher banking spreads and diminishing asset values.

Although the yields on money market instruments have increased, but the risk concerns and higher redemptions of existing investments have left the investing companies with limited and few options to opt for. Adding fuel to the situation, MTM TFC revaluation losses have increased and the mutual funds have registered billions of rupees as the TFC revaluation losses. The values have declined amid rising liquidity and other risks concerns in the market.

On the other hand, the recent banking sector spreads have hiked by 29 bps to 7.49% and the spread fresh loans has increased by 127 bps to 5.69% in September 2008. The banking sector will benefit the move in one way that it will be enjoying higher rates of return but on the other hand growing recessionary pressures will hamper their business activities. They will loose retail sales and will face credit and default risk problem from corporate ventures.

7-Jan 11.18 3.72 7.46 8-Jan 11.26 4.19 7.07
7-Feb 11.29 3.82 7.47 8-Feb 11.23 4.17 7.06
7-Mar 11.29 3.92 7.37 8-Mar 11.26 4.17 7.09
7-Apr 11.3 3.92 7.38 8-Apr 11.33 4.18 7.15
7-May 11.32 4.02 7.3 8-May 11.55 4.21 7.34
7-Jun 11.33 3.98 7.35 8-Jun 11.96 5.18 6.78
Average 11.29 3.9 7.39 Average 11.43 4.35 7.08

6-Month KIBOR rates are hovering at above 15% rates and are expected to touch 16.5% during the current month if the discount rate is increased. This will increase cost of doing business as the market rates are linked to KIBOR rates.

This may also elevate negative impacts on money market mutual funds too as their Mark to market losses will increase. This is evident from recent SECP move where TFCs have been ordered to be discounted by 5-30 percent depending on their ratings. The move has resulted in around Rs. 100 million losses for each income fund in the industry.


The continuously hiking interest rates, declining liquidity at all levels and higher cost of doing business have hampered economic activities in Pakistan, pushed inflation to the skies.

CPI inflation rates are floating at and above 25%, food inflation at more than 30%. The inflation is said to be demand pull inflation in Pakistan and the reduction in monetary aggregates will pull the inflation downwards.

The monthly data for monetary aggregates released by the SBP indicates that growth in monetary aggregates is declining. Broad Money (M2) growth has come down from the high of 19.9%YoY in Nov'07 to 15%YoY in Jun'08. On the other hand, Currency in Circulation (CiC) growth has declined marginally from its high of 18.1%YoY in Feb'08 to 16.9%YoY in Jun'08. The inflationary pressures will ease with the reducing monetary aggregates, analysts say.

But in some analysts opinion some part of the inflation is cost push. Our manufacturing and production industry is not much mature. It heavily relies on borrowing which is the real cause of increasing interest payments and resulting increased domestic commodity prices. Reducing commodity prices in international market will ease raw material prices which will ease inflationary pressure before taking any impact of expected discount rate hike.


The loans from bilateral donors have released liquidity in the markets and the markets are starting to function towards their previous normal growth but the process will take a good amount of time.

The declining commodity and raw material prices especially the waning crude oil and furnace oil prices will ease the inflationary pressures during 2HFY09.

State Bank of Pakistan seems to address liquidity problems and it looks determined to lower interest cost pressure on manufacturing and export sectors. These measures may include reducing discount rates. The measure will also benefit the banking and other financial institutions and will help boost the economy towards its previous goals.

The future doesn't seem bleak but needs some time & energy and better planning at government front to quicken the reconciliation process to its normal.