Feb 25 - Mar 02, 2008

While industrialists do not hold positive remarks about high interest rate monetary policy maker presents a reverse comment saying the increase of discount rate by 50 basis points, translated into only 0.5 percent rise of interest rate, has a little chance of leveraging cost of business operation. Along with, monetary policy tightening was primarily aimed at plugging current account deficit gap instead of forthrightly brining prices of food items down. Asserting his point in a desperate cogence, Riaz Riazuddin, maker of monetary policy statement for second half of the current fiscal year told high discount rate is more to affect non-food inflation than food inflation. Similarly, tightening monetary stance was adopted to give a way back to surplus money in the market that had caused swelling economic imbalances. In an interview with PAGE, Riaz Riazuddin, Economic Advisor and Head of cluster divisions, State Bank of Pakistan clarified present monetary policy would contain and curb imbalances to elevate further rather than cut them down. It would take considerable tenure to subside completely aftermaths of inflation, he added. As far as food prices are concerned, monetary policy does not have direct control over them instead it may affect non-food prices.


Responding to a question, he said, money market rate is not always proportional to the bank rate. In following days of policy implementation, the bench mark of lending rate: KIBOR showed a 25 basis points increment, equivalent to mere 0.5 percent and 100 percent contrast to discount rate, he referred. Thus, impact of lending and borrowing would be negligible. Commercial banks would not add much on benchmark and surge their lending rate to about 11.5 percent from present 11.3 percent, he underscored. When asked whether high discount rate might raise debt service obligation of consumers, yes, depending on new agreement of bank cost of credit may increase, he prompted. Normally consumer loans are charged with fixed interest rate, therefore, high interest rate will effect only in post-policy deals. Since, consumer loan is highly susceptible to high lending price, he expected decline in growth of consumer loans in near future. About subsequent rise in default cases, he said, default rate in consumer loans in Pakistan is still in lowest ebb as compared to other global financial markets. Replying to a question about incompatible spread of lending and deposit rates, he said, rate of return to depositors remains an abrasive issue to be resolved. In fact, he believed, cash reserve requirements would make banks to raise their rates of return in order to mobilize money from market. SBP does not adopt coercive measures to get financial policies implemented rather it facilitates market mechanism to accommodate variations. "Therefore, I believe commercial banks have to slide up (if slightly) rate of returns to depositors in course of meeting revised cash reserve requirement."


While replying to a question, he told, investment sought for working capital may be disturbed by high discount rate, however not to the extent often clamoured by lending dependent companies. Dispelling the impression that high interest rate spoils the smooth process of production of a company and brings substantial increase in the cost of production, he told, credit forms just four percent of the total factors of production of an organization. And, this is a grave misperception that organizational productivity declines due to the rise in cost of credit. In Pakistan, requirement of working capital in large scale manufacturing is mostly fulfilled by short term finances. Due to dependency of small and large sector companies on borrowing, there might few discrepancies emerge. But, overall cost of production would not skyrocket. Riaz expressed his utter displeasure over, what he dubbed, fabricated propaganda about high discount rate launched by companies, which are ruthlessly exploiting government incentives. The subsidies given to industrial processes did not augur well with the temperament of manufacturing and non-manufacturing companies as they concentrate their reliance totally on government capital line and disclose their low-spirit in paying off. Responding to a question, he said the outlook of growth of gross development products in Pakistan is far better than regional developing countries. However, for this fiscal year he projected real GDP growth of around 6.7 percent because of the target of 7.2 percent, set for the current fiscal year, is not achievable.

Riaz Riazuddin is working as an economic advisor of SBP and heading cluster departments of monetary policy; research; economic analyses; and statistics. These departments variably undertake various tasks that are reported periodically in publications of the research department. Typically, a review of inflation trend is published monthly, analysing data released by the federal bureau of statistics. Similarly, the department publishes every six months series of research working papers, known as SBP research bulletin, which have covered macro and micro economic research works such as on core inflation measures; macro determinants of total factor productivity; monetary conditions index; and empirical investigation of cost efficiency in the banking sector. The working paper has been enlisted in the American Economic Association list of journals. Being also the editor of research contents, he termed this an achievement as research papers come under subtle scrutiny for ensuring authenticity by external referees in abroad through, what he calls, double-blind standard in which author and appraiser carry pseudonyms. Unknowingness to each other staves off biasness in rating and manipulation by the author. Moreover, several others informative reviews on financial sector reforms have been derived from divisional undertakings. Prior to joining SBP as an additional director in 1994, Riazuddin was the assistant professor in applied economics department of university of Karachi.

Talking about the prospects in terms of monetary policy for the next fiscal year, he said, upward revision in discount rate or CRR in present policy statement was introduced to rein in turbulent flying of inflation and if all goes well, money supply may further be tightened in the next biannual revision because of dire need to subdue aggregate inflation back from its current level of nearing 8 percent. It all depends on the market. Noteworthy is the historical perspective that SBP had raised discount rate by 50 basis points in year 2007.