INFLATION, OVERLOOKED CAUSES, AND HIGH INTEREST RATE
TARIQ AHMED SAEEDI
Aug 1 - 7, 2011
The importance of growth-oriented lending rate cannot be overlooked in an economy that is confronted with high unemployment and poverty rates. Affordable cost of borrowing can alone drive the wheels of industrial activities.
Pakistan's economy has unfortunately experienced frequent pushes applied to the lending rate by the central bank, as inflation is adamant at double-digit level.
The inflation rate in Pakistan is highest in Asia and below only Vietnam (20 per cent until June) out of 17 regional economies examined by Bloomberg.
It is surely not 'unrestrained lending' that causes inflation to spiral upward in Pakistan. Domestic demand is also not its cup of tea. Pakistan's growth rate stood at 2.5 per cent last year (July 2010-June 2011) while many of the Asian economies including China, South Korea, Taiwan, Singapore, Vietnam, Malaysia, Thailand, Indonesia, Philippines, Cambodia and Laos are expected to grow 7.9 per cent this year.
There is a need to probe into some other causative factors such as inflows of speculative funds that are reported as a major reason of inflationary pressure developed in the emerging Asian economies.
Industrialization is imperative to improve economic growth that results in creation of employment opportunities. Presently, industrial production is being affected by worst kind of energy crisis.
Trade associations are demanding the government of taking cognizance of the situation. Last week saw lose in patience of trade representatives in Karachi on unabated load shedding that impinged on the industrial operations. Industrial areas in the city used to undergo eight-hour a day scheduled electricity load shedding and average two-hour unnoticed outages until last week. The usual spell of power cuts made them to have hinted at go-slows in all major industrial areas in the city. The frightening implication of such action would be massive unemployment to the least.
The root cause of existing power crisis is similar in all over the country. Electricity demand has outstripped the existing supply. The problem lies in the underdeveloped power sector both at generation and transmission and distribution levels.
SCARCITY OF FUNDS
Fund-constraint is the major issue confronting power sector. Insufficient fund allocation by the government towards power infrastructure could not enable the power sector to meet the growing national energy demands.
The underdeveloped power sector is in dire need of investments from both public and private sectors. Private sector always find itself reluctant to risk 100 per cent of its equity investments in any project let alone power sector, seeking obviously financial assistances from third parties like financial institutions.
It is strange that power sector that despite having immense investment potentials has yet to attract major investment inflows from local and foreign ventures. Therefore, one cannot come across single mega power project so far launched from the private platform. Independent power producers contributing significant shares in the national electricity production dither from investing in the potential laden transmission and distribution network wherein sizeable investments can reduce the gigantic line losses to at least 10 to 15 per cent from existing national average of 40 per cent or more.
Overcoming power crisis directly implies constant power supply to electricity consumers including industries, thereby making the economy surpass at least a key obstacle in the way of its due growth.
SOARING INTEREST RATE
High interest rate has shooed away the cash strapped businesses including small-, medium- and large-scale companies. Especially, small and medium sector that can play a major role in generation of income sources for the people is also deprived of financial assistances from banks. At current interest rate, cost of borrowing is too prohibitive. Promotion of entrepreneurship is possible only when microfinance at affordable borrowing cost is available for the entrepreneurs.
At the time of perniciously eroding buying power of masses, new ways of income generation and supplements can enable the people to fight price rises and improve their standard of living.
On one hand, the government is allowing rise in energy tariffs and prices of petroleum products and gas that normally open floodgates of price hikes across the board, and it is planning to withdraw subsidies on electricity on the other. A double-edged sword is fast approaching towards the necks of low-income group.
Proposed federal gas development surcharge is expected to pull the gas tariff up by 50 rupees per mmbtu for the domestic, commercial, and industrial consumers once implemented. This rise will certainly transfer on to the prices of compressed natural gas (CNG).
More over, the government has planned to cut the subsidy on electricity by Rs12 billion that is likely to raise electricity tariff by approximately two per cent.
While lending rate is increasing, rate of return on deposits is not encouraging depositors to choose banks as a main source of incomes. Bank spread rate, a difference of lending and deposit rates, in Pakistan is markedly high when compared to regional rates. An average in Pakistan stands nearly at eight per cent. In past, profit margins used to be attractive for the depositors.
It is worthwhile to note that many of the Asian economies presently adopted a tight monetary policy, shoving interest rate to control runway inflation. The reserve bank of India shoved the rate, at which it lends to commercial banks, to 5.5 per cent and benchmark deposit rate to four per cent in July to contain inflation under single digit. China's central bank also raised the benchmark one-year deposit rate to 3.25 per cent and one-year lending rate to 6.31 per cent in April. The push was aimed at to control unrestrained lending and curb inflation.
Asian Development Bank is (ADB) in favour of rising interest in the region as a befitting response to tame inflation. Pakistan's foreign reserves are reactively at good position of over $18 billion. Its growth rate is sluggish when compared to other economies in the region.
The US quantitative easing program is criticised widely for creating excess of "liquidity and inflows of speculative funds into emerging economies" and thereby inflation. Manila-based lender too dubbed "speculative money flowing into the region" one of major reasons of inflation.