Jan 26 - Feb 01, 2009

Since 2004 interest rates have shot up dramatically. The KIBOR increasing 261% the bank spread on a weighted average basis rose from a 2% to an unreasonable 7.75%. This magnitude of bank spread is among the highest in the world. The high cost of finance on account of the strident rise in interest rate and the inordinately high bank spread have offset the gains secured by the industry.

Interest rates all over the world are falling. In the US, the federal interest rate is at lowest-ever 1% and in the United Kingdom the rate has recently been reduced by 0.5% to 1.5%. On the contrary, in Pakistan the State Bank has increased discount rate to 15% and banks are charging a little less than 20%, perhaps the highest in the world. The rate of mark up on long term, short term industrial loans has reportedly registered an increase of 70% to 80%. Resultantly these loans are now being extended at 18% to 20%. The existing 15% policy rate in vogue in Pakistan has no comparison in the world as in India the policy rate is 6.5%, China 6.93%, United States 1.5%, Europe 3.75% (planning to bring down to 1%), Canada 2.5% and in UK it is 4.5%.


It is evident that such a high bank spread could be realized only with skewed effect to other sectors. These high rates are procured by the banking sector by leaving detrimental impact over the industry. The high interest rate is not only creating troubles for industrial units but also making Pakistani goods uncompetitive in the global market. A large number of industrial concerns have already closed down their operations as they could not pay back the loans they got on low interest rates. Current high rates are not only increasing the cost of doing business but have also affected competitiveness of industrial producers in a big way. The increase in interest rates would not only hit all the industrial sectors including Sugar, textile, plastic, steel but it would put a very negative impact on the agriculture sector, which is the backbone of the country's economy.

The textile industry of Pakistan is almost exclusively export-oriented unlike those of regional competitors that export an exportable surplus. It has the inherent capacity to bring about meaningful improvement to the economy. In order to compete in the international textile market, where the competition is cut-throat and operating margins minimal, the textile industry has to remain internationally competitive. The repercussions of a set-back to the manufacturing sector particularly the textile have been varied and diverse. At stake are more than 3 million direct jobs and 15 million family members may suffer. Further, the ramifications of the regressive affects of high financial cost that has impeded the progress of the textile industry extend to the agricultural sector. The high financial cost to the textile industry has therefore brought insidious results to the whole economy with negative effects on employment, exports, agriculture all of which are intertwined and integrated in the economic mesh of the nation.

However global recession and emerging deflation in the developed countries have started affecting Pakistan's exports, which are gradually declining since October. Though, the overall exports of the country during first 5 months (July-Nov-08) increased by 11.8%, the trend shows that exports are sliding downward. Exports fell to $1.427 billion in October-08 as compared to $1.954 billion in September-08. November figure slightly improved to $1.595 billion but is still much lower than the export trend set in July, August and September of the current fiscal year. Exports orders are shrinking but this will be clear in next couple of months as the New Year has started and the peak demand in the developed countries like the US and Europe is now over. Falling prices in the developed markets, especially in the US, were causing another problem for Pakistani products. These export products would not fetch the real price and their sale below cost price would erode profitability of the exporters. At the moment when China is extending loans to its industry at 9.5% to 11.5% mark-up how Pakistani industrialists could compete them in the global market. For the first two months of the current fiscal year, the large-scale manufacturing production index, including cotton yarn and cloth sectors, reported a drop of 6.46% compared to the same period in the prior year.

The economic outlook for the next 12 months is clouded by the prospects of a slow down in growth as investment activity has visibly dropped and business confidence is low. Pakistan sends about 42% of its exports to the United States and Western Europe. With both these regions facing recession, Pakistan's exports and workers' remittances could be at risk.


Government must provide breathing space to the industry to overcome liquidity problems, relax prudential regulations, reduce interest rates for raw material procurement and provide incentives for mergers and acquisitions to enable realization of economies of scale. Keeping in view the fast increasing trade gap the SBP, at least, should put a cap on the interest rates as boost to exports is only way to control the fast widening trade deficit.

The State Bank of Pakistan in consultation with all the Chambers in the country should evolve long-term policies for extending loans to the business community as it has been proven that a large number of businesses has become prey to short-term and ad hoc policies.


The Central Bank ramped up interest rates by 2 basis points to 15% in November 2008, the same month it signed a $7.6 billion emergency loan with the International Monetary Fund to stave off a balance of payments crisis. The Central Bank is not in a position to cut interest rates just yet as it works to ensure the economy meets targets set by the IMF. The IMF and the Central Bank have agreed on key quantitative targets, which will determine the Central Bank's policy limits. However, economic growth is slowing as the global financial storm unleashed on Wall Street in September reaches all corners of the globe. The central bank expects growth to slow to 3.5% to 4.5% this fiscal year, its weakest pace since 2001/02.