Feb 28 - Mar 6, 20

While narrow tax base, declining tax-to-GDP ratio, and increasing spending on the war against terror strain the economy, the businesspersons are facing pressure due to high interest rate along with high cost of doing business in the country.

The business and industry is not happy over the current discount rate (DR). This is because the rising interest rates, spurred by DR hikes, translate into high cost of doing business, turning industrial output, commercial operations and exports more expensive and less competitive. At the same time, the consumer, who is supposed to get its benefit, if and when inflation declines, are losers.

Pakistan is among those few countries where highest interest rates are prevalent. The policy makers use high interest rate as a tool to check inflation, however, despite high interest rate, inflationary pressure is gaining strength.

Experts believe that the central bank's efforts to counterbalance rapid expansion in the reserve money and arrest rising inflation expectations will require an increase in the policy or discount rate.

On the other hand, the business community is insisting a significant reduction in the interest rate, as it is a consensus recommendation by economists that monetary policy should be eased to control adverse effects of recession. They said the major cause of rising inflation is increase in the prices of industrial inputs and shortage of essential items of daily use. All these are inelastic products and monetary policy cannot control their prices. The inflation is not demand-pull. It will further paralyze the already numb industries and hinder new investment.

Analysts say the top banks have not even wished to go for long-term financing, as they have been making money without taking pain to do field work. "For the last five years banks have not been working hard to earn profits as they make money by just lending or investing into government papers," they said, adding 'Banks' higher profits do not reflect the true picture of the economy as they are not earning from the economy, instead they are profiteering by lending to the cash-starved federal government."

According to them, the private sector borrowed Rs112 billion in financial year 2010 compared to government's borrowing of Rs309 billion from commercial banks. The FY09 was even worst when the government borrowed Rs227 billion while the private sector credit off-take was just Rs17 billion.

The situation is same this year as the government borrowed Rs231 billion in first seven months of this fiscal 2011, while the private sector slightly improved its borrowing to Rs157 billion during the similar period.

Exporters are of the view that the high inflation like 15 and 16 per cent (SBP estimates for FY-11) would not allow people to save and keep their money in banks, instead they have been withdrawing their deposits to meet the sky rocketing price hike. They said, "private sector plays a pivotal role in strengthening the socioeconomic growth of the country and the private sector can only flourish and create employment opportunities if the environment in which it operates is conducive to business. Private sector requires loans for which they demand cut in interest rate."

Pakistan faces a number of significant challenges that are dampening its economic growth. Energy shortages, a deteriorating security situation, and a stalled economic reform agenda all discourage investment. The enabling environment for private sector development needs to be further strengthened within an improved policy and regulatory framework that consists of a defined industrial policy, competitive policy, an investment strategy, and stronger and capacitated regulatory institutions in key sectors of the economy. The government needs to redress the problems faced by the private sector: energy shortage, high utility tariffs, regressive taxation, high interest rate, and surging inflation, which are the major impediments to business activities. Resolution of these issues will enable the country to reduce the growing trade imbalance.