HIGH INTEREST RATE, POWER TARIFF IMPAIRING PROFITS
UNNERVED BUSINESSPERSONS DEMAND 10-YEAR ECONOMIC POLICY
Feb 28 - Mar 6, 2011
The higher interest rate due to tightened monetary policy by the central bank has been used as a tool to contain mounting inflationary pressures for the last three four years, which has produced convincing results till to-date. There was a strong thrust by the International Monetary Fund (IMF) of pursuing even tighter monetary policy to contain inflation without considering the fact that it is the oil and energy price, which is triggering the inflation, having no relationship with the interest rate.
It was pointed out by all major trade bodies including chambers of commerce and industry and industrialist associations that higher interest rate was causing paralyzing effects on the economic activity. They also emphasized that instead of increasing the interest rate the government was required to take corrective fiscal measures to support the economic managers in their efforts to control inflation rather than concentrating on monetary side. They also pointed out that that the heavy borrowing by the government from banking industry was stalling growth in the private sector on one hand while it was instrumental in adding to the inflationary pressures.
It is worth mentioning that the central bank has blamed that the rising inflation continues to persist due to relentless government borrowings. Hence, if the corrective measures are not taken seriously, it is feared that the price inflation may keep on rising by double digits into the next fiscal year as well.
The depressed economic situation calls for steps to keep inflation under control and these critical measures would be fiscal consolidation and reduction in fiscal deficit as well as the government borrowings from the central bank.
It may be recalled that in the January review of the Monetary Policy, the State Bank of Pakistan decided to keep the benchmark interest rate unchanged at 14 percent till the next review, which is due in March 2011. It will be interesting to note that the central bank has increased interest rates 150 basis points during last six months with a view to mitigate risks to macroeconomic stability.
However, an increase in policy rate of 50-100 bps is looming around on the back of at least 15 percent rise in oil prices expected next week. According to Senator Gul Muhammad, the economy suffered heavy losses in the wake of absorbing international oil prices to keep domestic price unchanged.
According to Senator Gul, the government was incurring huge losses due to oil price hike in the international market and the government in order to avoid political hue and cry did not pass on the differential of international oil price, and absorbed the same for the sake of peace on the political front. However, the burden has become unbearable leaving no option but to go for an increase of 12-15 percent in oil prices.
Since the opposition parties were not supporting the government on international oil prices, the government had to retain the current petrol prices at the current level.
The country has already suffered a loss of Rs25 billion due to increase in international oil prices during three months. Senator Lot feels that an increase in petrol prices is overdue and the government has no option but increase prices. As discussed earlier, besides the heavy borrowings from the banking sector the energy prices were also the major factor behind adding to the inflationary pressures as increase in fuel prices means multiple effects on general prices.
It will not be out of place to mention that the SBP Governor Shahid Kardar has identified that delays in crucial economic reforms have increased challenges for the management of the economy. Despite high interest rates, the fiscal deficit and borrowings from the banking system is continuing to stoke inflationary pressures.
The Chief of State Bank of Pakistan has called on the government to spell out a strategy to boost the economy. The private sector especially the trade and industry is getting unnerved due to heightening of the political noise. The trade and industry has strongly demanded of the government to devise a 10-year economic policy to restore the confidence of the investors that policy would remain intact irrespective to the political change.
The trade and industry, while proposing the government to embark on a ten year economic policy, has pointed out that the essential ingredients of industrial inputs such as interest rate, power tariff and gas prices should be ensured to remain predictable and a legal cover that there would no shift in policies during the stipulated period of the economic policy for ten years.
In fact, it was the reaction of the decision taken by PML (N) to part its ways with the ruling PPP in Punjab last week which is taken by the stakeholders of the economy from different angles. A large number of business leaders were of the opinion that the country was heading towards fresh elections and whenever there was a political change it affected the execution and implementation of the policies of the previous.
He was of the feelings that it was the high time to rescue dwindling economy of the country, which might jeopardize the sovereignty of the country. The unabated law and order situation particularly in Karachi is a major cause of worry to the business community.
While most of the economies around the world are on the path of revival and progress, the economic situation in our country remains unpredictable. Recalling the GDP growth rate which rose from 2.49 per cent, which rose to over 8 per cent in 2005, he said, it has again gone down from where it had started.
CONCLUSION: Pakistan is lucky to have a strong financial base on the back of world class financial players, have enough strength of fuelling the process of economic growth. But, this financial strength and resources are not used for developing a strong private sector. Pumping money into idle economy is a common practice at the lowest mark up rate even in the West and the US where economy is showing sign of recovery.
Access to consumer finance at an affordable price had proved a magical effect in the economy before 2005, which can be applied again to give a spark to the depressed economy.