HIGH INTEREST RATES DEVASTATING PAK INDUSTRIES

SHAMIM AHMED RIZVI
Mar 30 - Apr 05, 2009

Now when the inflationary pressures have eased both in the developed and the developing countries including Pakistan, it is the time to cut interest rate and provide some relief to the industrial and manufacturing sectors which have been badly hit by the prevailing high rate of interest from 15 to 18% on borrowing from banks.

It has already been done by China, India and in any other countries in the region. We must provide this relief to our industrial sector to reduce the cost of doing business and make their products competitive in the World Market.

Reportedly the International Monetary Fund (IMF) under whose pressure the State Bank of Pakistan (SBP) had increased the benchmark rate of interest from 12 to 15% as one of the conditions of the bailout package has also agreed to allow SBP some reduction in the discount rate.

Briefing the newsmen in Islamabad after his meeting with IMF team in Dubai, Shaukat Tarin, advisor to the PM on Finance, said.

"There still exists a four per cent gap between the discount rate, which stands at 15 percent, and core inflation which hovers at 19 per cent. However, if the decline in core inflation on monthly basis continues, then in April the government would reduce the discount rate accordingly".

"The Fund always pursues a policy to raise the discount rate under its programme, but Pakistan has managed to convince the IMF for a cut in the rate keeping in view the reduction in core inflation on monthly basis." In the month of June, he said, inflation would be brought to 10 per cent on month-on-month basis. The average inflation target has been revised to 20 per cent from 23 per cent, which the government would achieve by the end of current fiscal year in June. Tarin said, "Now we are looking at reducing interest rates which will help generate economic activities in the country".

The tightening of monetary policy was introduced by SBP in the year 2005. In the beginning it was welcomed by all concerned. Further tightening last year with further increasing the discount rate was, however, opposed by the business community as it was likely to hit industrial growth. Federation of Pakistan Chambers of Commerce and Industry expressed concern over the monetary policy saying it was major cause of slow growth in the industrial sector and widening of economic inequalities. It said the benefits of higher GDP growth rate, building of foreign exchange reserves, accelerated stock market index, and record growth of foreign investment had not trickled down to improve the living standards of common man. Simultaneous improvement in macroeconomic indicators and accelerated inflation and poverty had indicted the obstacle in transformation mechanism.

They were of the view that little trickle down effect was observed during the "macroeconomic growth regime" and the tight monetary policy was one of the major hurdles in the way of transferring the benefits of economic growth to the lower segment of the society by enhancing employment-generating activities through promotion of industrial investment.

The Lahore Chambers of Commerce and Industry (LCCI) also strongly reacted to the State Bank of Pakistan's decision to further raising the interest rate on the pretext of controlling fast increasing inflation in the country. In a statement, LCCI President said that the decision would not only increase the cost of doing business in Pakistan but would also destroy the local industry which is already facing shortage of power and gas. He said that instead of strengthening the supply chain to control inflation, the State Bank of Pakistan has increased the interest rate which will ultimately affect the whole production process.

The LCCI president said that it was a sorry state of affairs that at a time when the whole industry was already suffering due to high cost of doing business and complaining of being uncompetitive in the global market, the SBP has taken a totally unwise step. He said that the monetary policy announced by the SBP Governor will not bring any good to the economy but would further deteriorate the situation. He was 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 high inflation including food inflation would leave a very negative impact on the national economy. He said that if the government was serious to promote local business, it would have to look at the monetary policy anew keeping in view the ground realities.

Increase in interest rate forces economy to slow down while corporate profits are eroded. This also makes inefficient and smaller companies to slash jobs and sometimes collapse, as it becomes even tougher for them to service their debts. Despite ramifications of higher credit cost for the economic growth as well as the corporate profitability and viability, increase in interest rates is considered an effective response to inflation and inflationary expectations in an economy.

According to the Federal Minister for Industries and Production, Mian Manzoor Ahmad Wattoo, the exiting high rates are not only increasing the cost of doing business but also affecting the competitiveness of our industrial production in a big way. Both long-term and short-term policies were being evolved to ensure relief to the industry. According to industrial circles the high mark up rates and the imposition of 10% withholding tax on industrial electricity bills have increased the problems of businessmen. According to him, high cost of doing business needs to be addressed by lowering Customs Duty and Regulatory Duty on Industrial inputs and by providing energy on low tariff. The prevailing high rates of corporate taxes, especially sales tax need also to be reduced. They described present interest rates as the death knell for the manufacturing sector. This is leaving serious ramifications for the industry and exports. According to them, exporters debt burden and cost of servicing has increased that may spawn defaults, closures, job cuts and poverty. On the other hand, analysts say high interest rates are devastating for Pak businessmen.