Despite a declared
policy of the State Bank of Pakistan (SBP) for steady increase in
interest rates, certain quarters having a leaning towards dollar are
speculating a speedy rise in the interest rates, which had gone to the
lowest in the financial history of Pakistan.
Obviously, it was an
impact of the drastic cut in interest rates in the United States to the
level of one percent in the aftermath of 9/11 events.
Since the interest
rates has gradually started moving upward in the United States where it
is about to touch 2 percent, some players are of the view that the rupee
was linked with the US dollar and the financial market would have to
follow suit in Pakistan as well.
Ovais Kalia, an active
player in Pakistan financial market and a senior analysts of Khanani and
Kalia Group feels that though the interest rates would have to go up in
Pakistan as it's a global trend and we cannot live in isolation,
however, it may not repeat the history when the culture of polarization
used to prevail over the entire financial regime in Pakistan.
Ovais was of the view
that despite the horrible experience of 9/11 and its adverse impact on
the global economy it may be describe as a blessing in disguise
especially for Pakistan where the storm was weathered in favor of
economy by the present leadership.
In the present
scenario, both the interest rates as well as the exchange rates would
have to move towards an upward change. Although market forces are the
best judges to decide, yet there are certain segments of the economy,
which need protection.
For example it is for
the first time that the policy of auto financing has given a tremendous
boost to the automobile sector in Pakistan. It has yet to gain the real
height especially in view of demand growth.
Financing was yet another area, which is still halfway to take a
kick-start, once this sector start moving in the top gear, it will
certainly yield enormous economic benefits by giving a push to over 80
allied industries. Growth in the housing and construction sector is of
vital importance to address the severe problem of unemployment and
resolve the painful issue of poverty alleviation. Hence at this critical
moment, when the economy on the cross road, any major change in the
financial regime with reference to the interest rate may disturb the
whole scenario, Ovais said.
Things should be
allowed to move in a well calculated manner so that the economy, which
has come on the track after decades long nightmare, may stand on more
sound footings to face the challenges especially in an open environment
after implementation of WTO rules which are knocking at the doors.
Pakistan's central bank
has recently viewed about the possibility of increase in interest rates.
However the inflation pressures were not sufficiently strong to warrant
a more aggressive approach to monetary tightening.
State Bank Governor
Ishrat Husain has recently said that interest rates would continue to be
increased in a "measured" fashion to damp rising prices outlined in its
policy earlier in July last.
Interest rates have
been going up for the last several months, but there are a lot of people
who want a more aggressive increase in the interest rates. The bank's
position is there is no evidence so far that suggests we would be more
aggressive in interest rate rises.
The State Bank Governor
Dr. Ishrat Husain in his recent interview during his visit to Washington
said that slow, gradual increases have been implemented and will
continue to happen as the evidence on the economic variables comes in.
Otherwise economic growth is going to be choked off, and unemployment is
also a major issue, he said.
The State Bank has been
raising benchmark treasury bills yields since July, when it warned it
would tighten money policy in the first half of the fiscal year to check
rising prices and to stabilize the exchange rate, Consumer price
inflation, which hit a six-year high in July has been a major threat to
the country's nascent economic recovery. Analysts say inflation could
reach 6-7 percent during the current fiscal year, higher than the
government's 5 percent estimates.
inflation increased due to high oil prices and food price increases, the
rate of change slowed in August as the government moved to import one
million tons of wheat to meet shortfall.
However, the core
consumer price inflation, which excludes volatile items such as food and
energy prices, has not gone up so much, the governor observed.
prospect of further monetary tightening and the effect of water shortage
on agriculture, the governor said that the economy is on track to meet a
growth target for the current financial year. Pakistan's gross domestic
product (GDP) reached 6.4 percent in the year ended June 30 as compared
to 5.1 percent growth in the corresponding period of the previous year.
The government is
targeting GDP growth of 6.6 percent in the current fiscal year.
Agriculture growth last
year was only 2.4 percent, but despite this the economy succeeded to
obtain 6.4 percent overall growth which means it was the services and
manufacturing sectors that were the main driving factor behind the
growth last year. These two factors would continue to be the main force
of growth and Pakistan will be able to attain around 6.5 percent, the
Governor State Bank foresees.