In the present scenario, both the interest rates as well as the exchange rates would have to move towards an upward change

Oct 11 - 17, 2004




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 Pakistan 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.

Similarly, House 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.

While headline 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.

Notwithstanding the 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.