Oct 17 - 23, 20

Trade and industry leaders have asked the central bank to cut export refinance rate as it generously cut policy rate by 150 basis points to 12 per cent. This decision of the State bank has been widely welcomed by people hailing from business and trade circles. They termed the move as a right step in right direction.

According to them, tight monetary policy for last six years had failed to produce the desired results, as neither soaring inflation could be checked nor industrial growth could be increased. High interest rate retarded industrial growth. Now the ball is in the court of private sector.

How they will respond to the move taken by the State bank will be keenly watched during the next couple of weeks, analysts said.

A rate cut theoretically should spur increased lending and therefore economic growth, but Pakistan's looming energy crisis poses an obstacle towards growth and undermines any boost to the economy. The country is facing a gas shortage of nearly two billion cubic feet per day. Total electricity demand in summer months outstrips supply by 22 per cent - or about 6,000 megawatts - during peak hours.

In the developed economies, the markup rate is in single digit and they are maintaining it at all cost in the larger interest of their economies. Pakistan is among those few countries in the world where interest rate is much high. The need of the hour is to bring interest rate into single digit to help revive national economy through increased industrial activity with availability of finance at cheaper rates.

The Lahore chamber of commerce and industry (LCCI) has welcomed 1.5 per cent cut in policy rate and said it is the first step towards the revival of economy and the industry.

According to the LCCI President Irfan Qaiser Sheikh, the step taken by the SBP would help strengthen the economic indicators. He hoped that after two months when new monetary policy would be announced, the interest rate would further be restricted to single digit.

The LCCI President also thanked the Prime Minister Yousuf Raza Gilani for accepting the LCCI's demand regarding cut in the markup rate. Mr. Sheikh in a meeting with the PM had raised the issue of high markup with the Prime Minister, who had assured to bring down the mark up rate.

According to him, the Prime Minister had proved that he was ready to go to any extent for the revival of the economy and the industry in the country. The availability of cheaper liquidity to the business community is need of the hour, as in the last five years SBP's tight monetary policy in the name of financial discipline failed to give any positive results.

He said that the provision of ample cheaper liquidity is a must to set up new businesses but in the last five years the higher interest rate kept the private sector growth at the lowest ebb causing huge damage to the businesses apart from rising unemployment graph. He also urged the governor state bank of Pakistan to review all other economy related banking policies and help facilitate the private sector that is engine of the growth.

Former chairman all Pakistan textile mills association (Aptma) Gohar Ejaz said that the high cost of capital had damaged the viability of the industrial sector and eroded its competitiveness in the world market.

He suggested that the SBP should gradually bring down the discount rate to a single digit and equally cut refinance rate to give boost to exports, which is major source of earning precious forex. He was of the view that the exchange rate should be monitored carefully as a stable rate is equally important for export.

According to Pakistan Bedwear Exporters Association (PBEA) vice-chairman Naqi Bari, the SBP should simultaneously reduce export refinance rate, which was last fixed at 10 per cent on Dec 31, 2010. During this period, the State bank twice reduced the policy rate with a total impact of 200 bps but the export refinance rate even today stands unchanged.

It may be noted that the textile policy 2009 had fixed the export refinance rate at five per cent and an assurance was given that any difference with SBP fixed rate would be borne by the ministry of textile industry, which twice paid the difference to the exporters. However, after that no payment was made even though the export refinance rate had doubled from what the ministry assured to exporters.

Mr. Butt urged the State bank to cut the refinance rate by two per cent to eight per cent. He urged the government to ensure viability of industry and competitiveness of exports in the world market.

Pakistan Auto Parts Manufacturers & Exporters Association Chairman Tahir Javed Malik said that cut in markup rate was a prerequisite to enhance the productivity.

He said that this would help strengthen the industrial sector that was facing various crises and looking for relief. He said that recent cut in markup rates would put positive impacts on the industrial sector and help boosting the exports.

Mr. Malik said that though cut in markup rates was a good omen for the trade, industry and economy but the central bank has to bring the markup rate to the single digit. He hoped that markup rates would further be lesser to single digit.

Chairman Pakistan Industrial & Traders Association Front (PIAF) Sohail Lashari said that cut in markup rates would accelerate the economic activities in the country and boost the industrial sector.

He said that banks should also ease out its strict conditions for financing to support industrial sector and small-scale enterprises to survive.

According to him, high markup rates and less availability of cheaper credit for the private sector especially for setting up industrial units or reviving sick industrial units are hindering the future investment.

As per expectations, the country's share market also welcomed cut in the policy discount rate as perceptions of cheaper credit lines could give a tremendous boost to the investor purchasing power.

After cut in discount rate, traded volume soared to 7-month high of 183.078 million shares as some of the low-priced shares, having potential of higher capital gains, were the main attraction of the investors. Oil, cement and fertilizer shares led the market's advance.

According to a stock analyst, the initial positive investor reaction was more than welcomed and hopefully it could be sustained in the coming sessions also as the central bank's move is timely and will solve the liquidity problems of the prospective investors at cheaper rates.

He said: "The downward revision of the discount rate was broadly welcomed by the investors in general but will it spur the private sector investment is a question being debated by the investors." He said no one could doubt the SBP's perceptions about the state of the economy that needs boost by cheaper credit lines.

On the other hand, one of the main risks of a cut in interest rates is further depreciation in the Pak rupee on higher lending and money supply. A weak rupee also makes it more expensive to repay foreign loans, a major concern for debt-laden Pakistan. The rupee already hit a record low against the dollar.

According to official data, projected repayments during the year ending June 2012 to the IMF are $1.37 billion. The absence of IMF funding and a lack of foreign direct investment will put added pressure on the current account. The current account deficit shrank to $189 million in the first two months of the fiscal year, July and August, from $1.016 billion a year earlier.

Experts believe that the cash starved government will save at least Rs200 billion during FY 2011-12 after one and half percent reduction of bank interest rate as the government is the biggest borrower and payer of interest.

According to PPP Punjab leader Sami Ullah Khan Durrani, total national debt stands at Rs9995 billion on which government has been paying Rs1,400 billion as interest every year at the rate of 14 percent. After cut in the bank markup to 12 percent, the government would save Rs200 billion this year, which could be used for clearing the electricity circular debt and rehabilitation of Pakistan Railways.