HIGH INTEREST RATES VS LOW EXPORTS
Exclusive interview with Majyd Aziz, President KCCI
SADAF AURANGZAIB, Senior Correspondent
Dec 04 - Dec 10, 2006
The talk of the town is the tight monetary policy of the State Bank under which the increasing interest rates are damaging the pace of the country's high volumes of exports.
What problems it has caused to the industrial zone as well as to the business community need to be studied, for that reason we met the President of Karachi Chamber of Commerce and Industries, Mr. Majyd Aziz, who has a vast experience and expertise in many facets of business and economics. He gave us detailed facts and figures of the export situation of Pakistan in the wake of rising interest rates.
PAGE: How do you see the import rate substitution with the rising exports, do you think the situation is better than before?
MAJYD AZIZ: As far as the situation vis-a-vis import is concerned, I would say yes the situation is better than before, however, it is not because that we have opted more for import substitution strategy rather in recent past i.e. in the first four months of current fiscal year 2006-07 July-October, the imports were $9.4 billion. The imports declined by 8.33 percent to $2.131 billion during the first month of the second quarter of 2006-07 as against $2.325 billion last year. However, the declining import figure is mainly because of the reduction in import of machinery by the textile sector, decline in oil prices and, to an extent, a fall in imports of raw materials for industrial undertakings. So I would say that at this juncture of time we have not yet attained a situation of formidable import substitution, rather practical approach and pragmatic decisions are sorely needed.
PAGE: How do you see the impact of rising interest rate on our export industry? Do you think that the fluctuating trend is working better for the industry?
MAJYD AZIZ: As you know the State Bank of Pakistan is currently maintaining a tight monetary policy and in a bid to control the rising inflationary trend in the economy the interest rates have been kept on the higher side. However, the rising rate of interest will not have positive impact on the overall exports of the country, which were around US$ 5.5 billion during July-October 2006-07. Similarly for the same period all the 10 major products of textile exports have shown declining trend. Carpets and gems and jewelry exports, chemicals and fisheries all showed a declining trend during July-October 2006-07. The cost of doing business is already quite high and the rising interest rate has further aggravated the export situation. No doubt the rising rates may help in containing the inflation in medium term but will have negative impact on the export performance of the country.
PAGE: Does the rising interest rates or devaluation of rupee help or would curtail the exports?
MAJYD AZIZ: Though the decision of rupee devaluation against US$ will not have positive impact on the economy both in short as well as long run, keeping in view the deepening crisis being faced by the export sector, with all-around declining trend in key export goods, appreciation of US $ i.e. devaluation of Pak rupee may become a viable option.
PAGE: To what extant the rising inflation is hitting the economy?
MAJYD AZIZ: Yes, the rising trend in prices that in the economics terminology we call inflation has affected negatively on most of the economy. Postponing the decision to reduce petrol prices, increasing infrastructure rates and maintaining higher interest rates are a sure recipe for taking the economy step closer to the cost-push inflationary situation.
PAGE: What monetary measures would you suggest that could be highly helpful to the business community of Pakistan?
MAJYD AZIZ: Being the representative of business community, I would suggest that the rate of interest must not be raised any further since it will have negative impact on the exports of the country as well as industrial investment. Raising the interest rate is not the only option to control the rising inflationary trend. At this moment I would say that in order to steer the exports out of the deepening crisis, the interest rates should not be rationalized downwards.
PAGE: As a leader of the Karachi industrial zone what is your view on the overall economic growth and its pace at the moment?
MAJYD AZIZ: During the last four years, Pakistan's economy has grown at an average rate of almost 7.0 percent per annum and over 7.5 percent in the last three years, thus enabling it to join the exclusive club of the faster growing economies in the Asian region. During the last fiscal year i.e. 2005-06, foreign direct investment increased by 238% to US$ 3.1 billion, foreign exchange reserves stood at US$ 13 billion, per capita income in terms of GDP increased to US$ 847 from US$ 742. Inflation in terms of CPI i.e. Consumer Price Index declined to 8% from 9.3%. After 9/11 our economy, to an extent, embarked on an upward movement as compared to our economic performances during the 90s era. However, currently, as I've already mentioned to you, the exports during the first quarter of the current fiscal year July-October 2006-07, have shown depressing signs as almost all the major sectors ranging from textile, carpets, pharmaceuticals, etc have shown a declining trend indicating a difficult time for Pakistani exports in the near future. Similarly, after the entrance of Vietnam as member of WTO, the competition for Pakistani textile exports, which are already under tremendous pressure in the wake of fierce competition from neighboring countries like, China, Bangladesh and India, would be facing much more fierce completion. During the first four months i.e. July-October 2006-07, the imports stood at US$ 9.4 billion and exports at US$ 5.55 billion leaving a trade imbalance of $4.008 billion against the trade deficit of US$ 3.398 billion for the same period of the previous fiscal year. The expanding trade deficit does not manifest a strong and robust economic scenario vis-a-vis export performance of the country, since the exports have been showing a declining trend. So its time we must come out with proper and pragmatic economic measures and policies that may help in reducing the trade deficit and increasing the exports and reducing the domestic inflation of the economy. Let us study Vietnam. Let us talk about improving the fisheries sector. Let us direct our energies towards taking advantage of the FTA with Sri Lanka, and of course SAFTA. Let us get out of the box and prepare right and workable strategies.
PAGE: Do you think that by raising interest rate the government would be able to limit the inflation to 6.5% in 2006-2007?
MAJYD AZIZ: I don't think that by continuously raising the interest rate SBP or government would be completely able to control the rising inflation. The government can also go for other measures as well to control the rising inflationary trend in the economy by opting to open market operations like issuing bonds, as rising inflation in domestic market cannot be controlled only by raising the interest rates, rather a monetary policy also has other options to combat the menace of escalating inflation.
PAGE: How much the KIBOR is influenced by the rising discount rate?
MAJYD AZIZ: A constant rise in discount rate of the State bank of Pakistan (SBP) for three-day lending to commercial banks from 9 percent to 9.77 percent along with increase in the cash reserves requirement from 20 percent to 25 percent, has pushed up Karachi Inter Bank Offered Rate (KIBOR) to 9.07 percent per year and the three-month rate to 9.77 percent. Any further rise in either discount rate or cash reserves requirement will further increase KIBOR.
PAGE: Which industrial sector do you think has the most adverse affect because of the rising trend of the interest rate?
MAJYD AZIZ: Textiles is one of the major sectors, which are being badly affected by the rising interest rates. Secondly, I would say that the construction sector or put it differently the real estate prices are also going up and which may have negative impact on individual household/persons who would be investing in real estate sector by buying houses, etc.
PAGE: Do you think that the export refinance rate is in anyway helping the industry?
MAJYD AZIZ: Currently the export refinance rate is 7.5 % with a spread of 1.5 % totaling 9.0 percent, which exporters are supposed to pay to their lending banks. Last year the rate was 3.0 percent, since export finance rate is pegged with the yield of the treasury bills. State Bank of Pakistan kept on increasing the rate of export refinance bringing it to 7.0 percent for the commercial banks keeping a maximum margin/spread of 1.5 % for commercial banks, leaving it for exporters to avail it at the rate of 9%, which I feel is quite high. As an exporter, I suggest that SBP should bring it down to a feasible rate not exceeding 4 %.
PAGE: How much do you think the rising trend could influence the local and foreign investors to work towards rising exports and in the long run how much could it affect the trade deficit on the country's economic graph?
MAJYD AZIZ: During July-October 2006-07, the trade deficit stood at around US$ 4 billion as against US$ 3 billion of the same period during 2005-06 and this rising trade deficit does not indicate a positive sign. This is mainly because of the declining export performance and lower import performance as well. However, at the same time in domestic money market the rate of interest has also been raised. The increased interest rate and rising trade deficit coupled with falling export performance will have mixed impact on investment both domestic as well as foreign. It is a good omen that during the last fiscal year the foreign investment rose by 238% to US$ 3.1 billion. Our image as a progressive nation has also improved in the western world and I, therefore, am very much optimistic that in the current fiscal year the investment level would go up. The recent visit of Chinese President Hu Jintao to Pakistan was also quite fruitful for us since more that 30 MoUs including investment opportunities were signed with China along with signing of a FTA. As far as the impact of the investment on export is concerned, I think there are ample opportunities in various sectors like fisheries where we can have specific foreign investment. According to a research, if Pakistan's marine resources are fully utilized then we should be earning more than one billion dollars from the fisheries sector. Our government should have a dialogue with friendly countries like China to get their investors attracted to invest their capital in fisheries sector of Pakistan. Secondly, tourism is a sector that has long been neglected by our government and it must be upgraded to attract the foreign investors into this sector as well.
PAGE: As a voice of the business community, how would you explain their concern in this regard?
MAJYD AZIZ: The rising trade deficit is obviously not a good signal for the overall economy since it is one of the important factors to determine the growth rate of the economy. In order to curtail the swelling trade deficit, earnest and serious measures must be taken to uplift the falling exports of the country.
PAGE: The banking industry signaled further rise in the interest rates to combat the persistent inflation, how do you see the role of the banking industry? It has gained huge profits due to high interest rates but none of these profits in any way trail down to the depositors.
MAJYD AZIZ: Though the banking sector would be getting windfall profits because of the rising interest rate, however in long run it will not have sustainable impact on the performance of the overall economy because the rising rates would be hitting hard the major sector of the economy i.e. exports. Secondly, individual depositors have not yet gained any profit out of this rising trend.
PAGE: What hopes do you have despite the problems that the industrial sector is facing at the moment?
MAJYD AZIZ: One should always be an optimist and keep a positive outlook. Despite the problems, we should not lose our hopes for better and prosperous circumstances. There is always light at the end of the tunnel. The falling, rising, booming and recovery phases are all part of the business cycle, which is one of the important topics of contemporary as well as classical economics.
PAGE: How do you see the future of Pakistani exports in years to come?
MAJYD AZIZ: After the full implementation of WTO rules and regulation and abolition of textile quota, our textile exports, which is the primary segment of total export has been facing fierce competition from neighboring countries like China, Bangladesh and India. At the same time, availability of quota to Chinese textile in US markets is badly hitting our textile exports. Entrance of Vietnam as member of WTO will add fuel to the fire. It is high time we gear up our efforts. Cost of doing business must be brought down, including transportation cost, utility charges and oil prices. These are some of the badly needed decisions the government has to take.