Mar 30 - Apr 05, 2009

The Governor SBP was quoted saying, 'The monetary policy will be reviewed every quarter this year unlike six monthly reviews as done in past.' The next policy statement is due in April where the interest rate is expected to be revised. Analysts are predicting the rate to be eased 100 to 200 bps points as the inflation as predicted by SBP is to ease down to 11% until June 2009.

The escalated interest rates had increased borrowing costs and severely dented growth in the economy, which is predicted to be only 2.5 percent this fiscal year to June 30, down from 5.8 percent last year. Major industries like manufacturing and services sectors were highly leveraged and this higher interest rate scenario had blanked their expected future growth. Many companies halted or seized their operations in the wake of this economic slump and other reduced production to cater to the existing slow demand only.

As a result of these adverse changes the financial performance of all the companies and sectors deteriorated and hence the investment market especially the stock (being leading indicators) dived down to their lowest. The investment was squeezed within a few months and market's liquidity risks increased which resulted in further market slump.

Due to manufacturing and service sector decline, the foreign direct investments in Pakistan, which was growing at a robust 5 year cumulative aggregate growth rate (CAGR) of 52.65% & the total foreign investments at 42.46% have dived to their lowest. Portfolio investments in stocks have been most volatile, which stood at US $ 311 million during FY-04, marked high of US $ 3,288.30 million during FY-07, but declined to US $ 40.16 million for the FY-08.

In short Stock market has been hit three folds due to increasing interest rates: one is CFS financing, which was the main elevator of stocks, reduces to minimal. Secondly Industrial decline resulted in lower forecasting of future stock prices and finally all at the end of declining index people started saving and investing in commodities which created liquidity crunch in the financial market and stock market could not get any survivor hand. The market discounted its values by more than 50% and touched 4000 points from above 15600 level's peak.

Now the movement on the path of restoration has certainly gathered pace in the last three months with the country achieving the milestone like

Surplus in the Current Account after persistent deficits in the preceding twenty months,

Reduction in inflation rates on a cumulative basis,

Stock market regaining pace, and getting its position in Emerging Market Index by Standards & Poor's.

The Current Account deficit is US$7.45bn during 8MFY09 as compared to US$8.64bn in the same period last year, down 13.7% Y-o-Y. On the other hand, core CPI has remained sticky despite the adoption of strict monetary & fiscal policies. But as the interest rates have shown their pace down, inflation will automatically slow down to its original levels.

Interest rate decline, as is apparent in the market from sharp decline in KIBOR and cut-off yields on Government securities, will certain boost financial market performance. This phenomenon has already begun to yield its positive impacts on stock market. As the interest rate increase had tripartite impacts the decline will also result the same but in different direction.

This will reduce the financial costs of almost all the companies and will help them enhance their production activities. This will result in higher price expectations and hence more buying today.

It will reduce CFS rates and hence will multiply volumes at the market and as a result

The increasing stock activities will discourage savings and investment in the gold and other commodities and more money will flow to the market.


Will the positive signs continue their pace? This is a big question mark as the Treasury bills auctions are now determined by the Ministry of Finance and the cut in cut-off yield may not find its proportion in SBP discount rates, as predicted by analysts!!!

Considering that the SBP has separated debt management from monetary management, it is now difficult to integrate the signals coming from different money market sources. But one thing is for sure the discount rates are to be eased and the range of the decline may differ.

We now can safely conclude that the decline in the interest rates will, as broadly concluded, will bring prosperity to the investors (especially stock market investors), help reduce inflation and certainly put economy on track.