June 02 - 08, 2008

LAHORE: The recent measures announced by the Governor State Bank of Pakistan (SBP) raising the key discount rate to 12 per cent and imposing a 35 per cent margin on Letter of Credit (L/C) have been taken negatively by the people engaged with the capital market and different businesses.

The businessmen were of the view that they may face a liquidity crunch because of the imposition of 35-percent margin condition on the Letter of Credit (L/C) while the condition will further cause price hike of all the import-based products. However, the market people opined that the State Bank instead of taking tight monetary measures should check other factors responsible for food inflation in the country.

According to bankers, further tightening of monetary policy by the central bank would reduce the inflationary pressures on economy and narrow the current account and trade deficits. The headline inflation is standing at an alarming level which on year-on-year basis has almost doubled in just four months.

Regarding levying of 35 per cent margin on Letter of Credit (L/C), they said this margin would not be applied to oil and selective food imports. The real economic costs of the central bank borrowings cause enormous inflationary pressures, whose burden falls on businesses, industry and the public at large. So the government is best advised to launch a programme of scaling down the SBP borrowings by reducing its stock of borrowings from the central bank over the next few years.

On the other hand, businessmen associated with industrial and export-oriented sector have rejected the tightening of monetary policy by the SBP through raise in discount rate and said it would increase the financial woes of industry.

Pakistan Auto-parts Exporters Association Chairman Tahir Malik told PAGE that hike in discount rate on the pretext of checking the inflation would not bring desired results. He said the government should take corrective measures to improve the food supply situation, which is contributing in the surging inflation.

"The fresh hike in discount rate, ultimately increasing the interest rate would be doing nothing to curb the inflation, but would be adding further the financial cost of local products," he said.

Malik described the State Bank's decision totally illogical and irrational and said it will add the cost of production which is also on the rising trend because of mounting oil, electricity and gas prices in the country. "The importers will have to deposit huge amount in the banks on account of opening of Letters of Credit and will get no interest from the banks. The liquidity becomes more expensive if an importer gets loan from a bank to fulfill the L/C margin condition," he added.

The Lahore Township Industrial Association Chairman Amjad Ali Jawa told this scribe that the Quaid-e-Azam Industrial Estate that comprises more than 400 (mostly export based) industrial units are dependent on their raw material imported through various sources in the world. He said they were paying nil margins on Letter of Credits for the purchase of these raw materials but changing this nil margin with 35 percent advance cash margin will render all the purchases virtually stand still, he said. "If increase in the margin was essential, it should have been levied on luxurious and commercial imports instead of industrial raw material. The industries are planning to lay off thousands of workers as from next month, there will be no raw material available," he added.

The Lahore Chamber of Commerce and Industry's former vice president Mubashar Shaikh was of the view that Pakistan was an import based country and any irrational approach may aggravate the businessmen problems. Because of the L/C margin, all products, particularly import based items like plastic, pharmaceuticals, steels, chemicals, will become more expensive, he opined. He said the State Bank should have at least exempted the imports of industrial raw material from this condition.

Shaikh termed the monetary policy a major cause of slow growth in industrial sector and widening of economic inequalities in the last few years. "We are making efforts to reduce the cost of business so that our products could compete in the international market, but what government is doing tantamount to push the industry to wall," he regretted.