INTEREST RATE CUT BRINGS NO RELIEF TO EXPORT-ORIENTED INDUSTRY

SYED FAZL-E-HAIDER
Dec 7 - 13, 2009

Last month, State Bank of Pakistan lowered its benchmark interest rate by 50 basis points to 12.5 percent from 13 percent for a third time this year to spur economic growth in the strife-torn country. The central bank cut the key policy rate as inflation eased to a 22-month low of 8.9 per cent year-on-year in October, and as various macroeconomic indicators showed improvements. The textile industry, which accounts for two-thirds of the country's exports, is still struggling to revive growth amid rising interest rates.

The cost of doing business is constantly going up not giving a sigh of relief to industrialists. The exports of apparel from Pakistan in the last ten years had increased from $1.5 billion to only $3.5 billion, whereas in Bangladesh the exports increased from $1.5 billion to $12.5 billion, which showed that Pakistan's exports were much below as compared to other competitors in the region.

Last month, the central bank said in a statement that it did not cut the rate by more as it maintained a cautious approach. 'Striking a balance between monetary and financial stability and real economic activity has become increasingly difficult,' according to the central bank.

The central bank kept its discount rate unchanged at 13 per cent on Sept 29 after a cut in August of 100 basis points. The slowing inflation has enabled the central bank to reduce interest rates. The country's consumer price index (CPI) rose 8.87 per cent in October, the slowest pace in 22 months as it had peaked at a record high of 25.3 per cent in August 2008.

'The cut was in line with expectations but it seems that this will be the last change for the current fiscal year,' Reuters reported Asif Qureshi, director at Invisor Securities Ltd as saying.

The country's external debts and liabilities have reached to a new peak of $55.2 billion during the first quarter (July-Sep) of current fiscal year 2009-10, against $52.33 billion at the end of last fiscal year. The current upsurge is mainly due to International Monetary Fund's (IMF) standby loan package of $7.6 billion, which was further increased in July to $11.2 billion, to avert balance of payments crisis last November.

Critics say that the rising debt would leave nothing for the private sector and contraction in credit for private sector would lead to further slump in business activities. Instead of resorting to foreign borrowing, the government should take measures to reduce non-development expenses and widen tax base by bringing more sectors in tax net to generate more revenues.

The government has set a GDP growth rate of 3.3 per cent for the current fiscal year 2009-10, while the IMF has predicted a 2 per cent growth. The government is appealing to its 8 million expatriates to help resuscitate an economy that has slumped after a seven-year boom. Remittances in the four month period ended Oct. 31 rose 32 percent to $3.1 billion.

Under the IMF demands, the government has decided to increase the power tariff by 18 per cent in two phases next year 12 per cent in January and six per cent in April. Local business community has strongly resented the government's decision of increasing the power tariff from January next saying the move will bring the already ailing industries on the verge of total collapse.

The hike in power tariffs would badly hit the industrial and business concerns, which are already in doldrums, due to highest-ever increase in the cost of manufacturing and doing business owing to the multiplicity of taxes and levies and excessive utility tariffs, reported daily Dawn, citing Abdul Majid Haji Mohammad, President Karachi Chamber of Commerce and Industry (KCCI). The export-oriented industry would be the worst sufferer, as it would not feasibly materialize its export orders resulting to a wider gap to fill the fixed export targets as announced in the trade policy.

The country's overseas sales of textiles are threatened by growing terror attacks, power outages, and poor market access. "Textile buyers like to come, see, and feel the product," Bloomberg recently reported Umer Mansha, chief executive officer of Nishat Mills Ltd., the country's biggest exporter, as saying. "The situation is such that buyers are simply not willing to come here. It's very hard for us to get new clients."

The country exports textile products worth $3 billion a year to the US where the total textile market is worth as much as $110 billion. The country's share in the American market could grow to $10 billion in a short time if Washington agrees to allow it duty-free market access. Local exporters say increase in their share of the American as well as the European markets is hampered by duty-free access given to textile exports from Bangladesh and Sri Lanka.

The country's trade deficit widened to $1.37 billion in October compared with $1.98 billion in the same month last year, according to the Federal Bureau of Statistics (FBS). Exports stood at $1.59 billion in October against $1.48 billion in the same month last year. Imports were worth $2.97 billion in October compared with $3.46 billion in the same month last year.

The country recorded a provisional current account deficit of $531 million in October compared with a provisional current account surplus of $174 million in September. The analysts argue that the rise in the deficit from September to October is mainly due to a higher import bill stemming from rising international oil prices.

Pakistan is the only country in the region where interest rate is still higher. The country lags behind its neighbors in economic growth and exports due to high interest rate and energy crisis. The other countries have already reduced the interest rate to the lowest level. As compared to12.5 percent interest rate in Pakistan, the neighboring India is currently managing 3 percent. Local industry is facing power shortages and squeezing local and international demand, while banks are not risking their money to support the private sector.

Critics say that while other countries of the world are cutting down their discount rates to boost the economic growth, interest rates in Pakistan are still higher despite the negative growth in the industrial production. The analysts believe that the Gross Domestic Product (GDP) growth has declined due to economic slowdown following the tight monetary policy.

The decline in growth rate and decreasing currency value has led people to expect more inflation and massive increase in the joblessness. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry. The local manufacturers forecast more industrial closures and job losses over the next one year. The middle-class income group is slipping fast into the poor class while vulnerability of the lower classes has further aggravated.

Many analysts believe that cutting interest rates to single digit will produce multiple benefits for the economy, as it will lower the cost of doing business, give a strong boost to business and industrial activities, provide easy credit and loaning facilities to trade and industry, promote better investment and exports and generate more tax revenue for the government.