Feb 25 - Mar 02, 2008

In the policy announced on February 1, the SBP raised the discount rate by 50 basis points to 10.5 per cent that may push the lending rates of commercial banks to 13 per cent plus. The SBP also enhanced cash reserve ratio (CRR) by 100 basis points for deposits of one-year term to eight per cent. The new discount rate will be 10.5 per cent in effect from February 1.

The SBP's move was against the global trend of reducing the interest rate. The US Fed Reserves has cut the interest rate by 1.25 per cent in just two days to bring down the rate to 3 per cent. However the governor said the increase in the discount rate would not have any impact on the economic growth outlook which would remain around 6.5 per cent to 7.2 per cent for the current fiscal.

According to SBP, the decision was taken to draw off excess liquidity from the system which was mainly because of higher inflows of foreign exchange through remittances. The double action of the monetary policy, increase in the discount rate and the CRR, would affect the cost of borrowing and it would ultimately limit the supply of money in the market and reduce inflation.

Industry and trade leaders came out immediately with their harsh reactions on monetary policy, warning of a further slow down of businesses and closure of enterprises.

President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Mr. Tanvir A Sheikh said in a statement, "Monetary policy is a major cause of slow growth in industrial sector and widening of economic inequalities in last few years,"

Under the Long-Term Financing Facility for export-oriented industries, a sum of Rs8 billion has been allocated for utilization up to June next. The borrowers have been given option to borrow for three different terms. A three- year loan will carry eight per cent interest, five -year loan nine per cent and 10 -year loan 10 per cent.

Adil Mahmood, a leader of All Pakistan Textile Association (APTA) said. "How can we think of setting up new factories when our existing plants are being closed because of financial and infrastructure problems?"

PAGE took an interview of Mr. Shamim Ahmed Shamsie, President KCCI, where he briefly pointed out that as to how the whole economic situation is crumbled down because of the current ongoing crisis in the country, rising interest rate being a major factor in it. He said that the interest rate has been raised because of the recent influx of so many troubles that are causing a deterring effect on the overall economic sphere.

Industrialists who have taken loans to put up industries are now pressurized to close their units down as they even couldn't earn their ground marginal profits because of the rising interest rate scenario that is increased by another half percent during the current six months period. As the cost of doing business is getting higher with the utilities prices are increasing day by day, how could an industrialist be sure of not to get bankrupted.

He said that the government should plan the things so that the cost of doing business would become less and there would be motivation for businessmen and industrialists to work with their existing units and also work on the expansion plans otherwise if the confidence of industrialists would be shaken by constant tremors of amendment in monetary policies then there would be less supplies and less exports and high inflation. Also if a common man would not remain employed then the major layoffs can create a law and order problem which is already in a bad shape.

He said that only interest rate is not a contributor but a whole lot of other factors are making things worsened for an industrialist. Firstly there is no good governance and we are trapped within law and order situation. The utilities without which industries could not run are not on constant supply. There needs to be an enabling environment to keep our industries running.

He appreciated media for playing a positive role to make people realize and understand about so many things and which has made people select the people of their own choice and they have rejected others on account of liberalized policies, which have made more cars available on roads while there is no action regarding the public transportation system, where there is a severe wheat crisis etc. Whichever party will come in power, if it couldn't satisfy the common man's needs, then they will again reject them after five years. The domestic economic policies should be designed in a way that common people will get the benefits.

He stated that impact of growing interest rate is not just posing problems to domestic trade but external trade is also affected by it as it contributes to the rising cost of business hence the whole economic cycle is influenced. Given an example of India, he said that there the government has recently withdrawn taxes on transportation cost which is to motivate exporters to keep exporting. If the product is manufactured in Chandigarh and is to be exported from Mumbai then the transportation cost would be much lesser and this marginal difference is a huge motivation for exporters. These kind of small measures are taken to keep the confidence of their trading body alive in trading activity.

In Pakistan, he said that good governance is a must for better trade activity. Also the agriculture credit spread needs to be practiced in all provinces in the similar pattern it is pursued in Punjab. The provincial governments should take appropriate measures to gain the confidence of farmers which will also help the farmers as well as the common man. The overall situation needs to be monitored properly and the new government needs to look in this direction.

He said that the new government has to see the priorities in order to gain the confidence of the public. If it needs a revision of policies, then they should do things accordingly. The country has suffered a lot in 2007, and we all have great hopes but now the question arises as to how the government would try to pass on the international oil price burden to the consumers, which is contained by the Musharraf's regime till yet as that will again raise the prices of common commodities to an unprecedented level. The government must seek out the factors that bring in more inflation and the measures that bring more employment, by keeping a balance between the two; we can make our walk through this critical phase.

We have seen that the simple monetary actions couldn't bring down the inflation, and it has passed tremendous problems to the industry, agriculture and trade. The way we can contain this inflation is not through tightening monetary policies but by increasing common man's earnings, increasing supplies and generating employment. We have to clearly define certain strategy to develop the SME sector as government and private sector couldn't produce so many jobs, with the help of promoting SME, we would be able to bring small earnings to people that would be enough for their subsistence. Strong middle class needs to be developed and proper measures have to be taken for it.

In his suggestions he said that the new government should gain the confidence of common man by introducing proper measures. The parties should adopt a conciliatory rather than confronting policy. They should work together to bring the harmony back to the economic phase of the country. Also, government must take the people of commerce, industry and trade into confidence while formulating monetary and fiscal policies.

In his message, he brought about that planning is a must for the sustainability of policies. We have no direction and we have lost our line of action because of the lack of planning in our economic reforms. We need to keep five years or ten years plan in mind while making policies. Also, Research and Development needs to be given a proper focus; education and training are must too. When we will train our masses, then they will become our assets rather than burden. Whatever developmental plans are taken, there must be a positive motive behind; otherwise it will become obsolete. We must not construct bridges to shift the traffic burden but we also think about as to how this can become more fruitful. If we have visions like holding Asian games by 2030 then we will be able to gain opportunities to getting business and much bigger market accessibility outside Pakistan.