Aug 24 - 30, 2009

The economic situation in Pakistan is awfully uncertain, grim, and changing rapidly. Pakistan is lagging far behind other countries in economic growth and exports due to high interest rates and energy crisis. Pakistan is the only country that is managing a very high discount rate in the region as most of the countries have already reduced the interest rate to the lowest level. The State Bank and most of commercial banks have realized and admitted that high interest rates slow economic growth. As a result, today the industry, trade, and exports are in the clutches of retrogression. Power shortage is also a matter of deep concern, plaguing our economy and it is the most critical factor hampering economic activity in the country.

As a matter of fact, there has been a negative credit growth during last year which resulted in a very low economic growth of 2%. SBP is now encouraging banks to enhance lending to private sector to provide necessary stimulus to economy. But the core issue was the high interest rate which made the business costliest in the region. Banks were also willing to see a big cut as they were unable to increase credit to the private sector. The demand has been low while the risk remains high because of mounting NPLs. Overall private sector credit (PSC) after recording a growth of 16.5% during FY08 registered an increase of only 0.7% during FY09, mainly due to slowdown in economic activity, coupled with the global recession and rising non-performing loans, etc. On cumulative basis, credit for export finance has registered a disbursement of Rs15.4 billion as compared to Rs19 billion last year.

In the wake of economic meltdown and slow GDP growth rate, SBP has now adopted a policy of cutting interest rates. Central Bank shed 100 basis points earlier this year i.e. in April 2009 and rate was brought down from 15% to 14%. In continuation of the same pursuit and while announcing a review of the monetary policy during August 2009 the State Bank has again reduced the interest rate by 100 basis points, bringing it down to 13%. This time an interest rate corridor is also introduced for the money market overnight rates. It means banks can borrow from SBP at 13% while they can place their liquidity at 10% with the SBP at the end of the day. Interest rate corridor is a part of the agreement with the International Monetary Fund which Pakistan signed to receive $7.6 billion in November 2008. The frequency of monetary policy decisions has been increased from four to six times a year. Henceforth, monetary policy decisions will be announced in the last week of September, November, January, March, May, and July.

Despite all these structural changes the business circles of the country are disappointed and have maintained that 1% cut in the discount rate will not lead to the revival of industry. The businessmen were demanding for at least 2 to 3% cut whereas meager 1% reduction is not likely to be a source of revival of shaken economy and industry. Industrialists are of the view that the interest rate should be cut down to below 10% as one percent reduction could not spur any positive change in the economy. High rates not only increase the cost of doing business but also affect the competitiveness of industrial producers on industrial scale and global markets. Three big issues including electricity load-shedding, gas shortage and high interest rates have hampered industrial growth. High cost of doing business needs to be addressed by lowering customs and regulatory duties on industrial inputs and by providing energy at low tariffs. Banks are to be instructed to reschedule or restructure their loans to the already sick industries.

All the sectors of the industry have been hit hard by sky rocketing credit cost. Manufacturing, mainly in the textile sector has declined, with a related drop in exports. The textile industry of Pakistan is almost exclusively export-oriented unlike those of regional competitors that export an exportable surplus. It has the inherent capacity to bring about meaningful improvement to the economy. In order to compete in the international textile market, where the competition is cut-throat and operating margins minimal, the textile industry has to remain internationally competitive. The repercussions of a set-back to the manufacturing sector particularly the textile have been varied and diverse. At stake are more than 3 million direct jobs and all chances of 15 million family members to be subjected to suffering. Further, the ramifications of the regressive affects of high financial cost that has impeded the progress of the textile industry extend to the agricultural sector as a result of the highly compromised capacity of the principal cotton purchaser that the textile industry is, to lift and utilize cotton, the principal cash crop. The high financial cost to the textile industry has therefore brought insidious results to the whole economy with negative effects on employment, exports, agriculture all of which are intertwined and integrated in the economic mesh of the nation.

The overall economic situation still seems difficult but indicators show some signs of recovery. Foreign investors have been skeptical about Pakistan's near-term prospects. This is the time to persuade them to pour money back in the system.


There are signs of improvement as instability on external front has been addressed while inflation sharply fell to 11.2%. The economic strategy of stabilization seems to be achieving its targets, The growth rate has taken a hit, but the fiscal, trade and current account deficits have narrowed significantly and inflation contained within limits, indicating return towards macroeconomic stability. There has to be convincing policies to promote private investment and removal of hurdles such as energy shortages and high mark-up rates to facilitate and encourage particularly the manufacturing sector currently under stress.

At the moment, the challenge is to revive the falling private sector credit and economic activity given the relatively tight liquidity position of the system and increased risk aversion of banks. The revival of private sector credit is critical for facilitating increase in investment in the economy. The challenge to the government, therefore, is not only to resolve the power generation problems but also to arrive at a solution that does not distort the incentives for promoting economic activities.