HIGH MARKUPS HINDERING FUTURE INVESTMENTS
THE BUSINESS COMMUNITY IS CONSISTENTLY DEMANDING THE GOVERNMENT TO SAVE THE NATIONAL ECONOMY AND INDUSTRY BY BRINGING THE POLICY RATE TO SINGLE DIGIT.
June 18 - 24, 2012
With interest rate in Pakistan consistently hovering in double digit for the last five years, one would expect the masses to be encouraged enough to save and reap benefits of higher returns. Currently, the interest rate of 12-percent is one of the highest in the region, as domestic exporters have become uncompetitive in export market due to massive overheads.
Interest rate in the United States is 0.25-percent, in UK 0.5-percent, Canada 1-percent, Australia 3.5-percent, Japan 0-percent, China 6.56-percent, Sri Lanka 7.75-percent, Bangladesh 7.75-percent, and in India 8.5-percent.
Due to high interest rate, Pakistan stands out to reflect one of the lowest savings in the region. According to the World Bank, savings in proportion to the country's gross domestic product (GDP) stand around 22-percent in Pakistan compared to 38-percent in Bangladesh, 34-percent in India, and 25-percent in Sri Lanka.
Pakistan's savings ratio has actually plummeted from 26 percent in 2002, while the rest of the comparable nations in the region have shown a consistent increasing trend in savings during the same period.
The business community is consistently demanding the government to save the national economy and industry by bringing the policy rate to single digit. In any country where the economy is facing a recession, the interest rates are brought down to stimulate growth, whereas in Pakistan it is the other way round. In the last two years, interest rates in Europe and the United States have been brought down close to zero to save the economies from collapse.
This is the time that interest rates should be brought down to a single digit to spur growth. There is a total uncertainty in the country's economic sector due to high markup rates. Policy makers need to take steps to bring down mark-up rate to increase investment for improving the economy. There is a dire need of private sector investment in current crisis prevailing in our economy.
SBP is using interest rate as a tool to compensate for the government's borrowing for financing its current expenditures. High policy rate would not provide any relief to the industrial or corporate sectors, and it could result in a deepened recession this year. High mark-up rates and less availability of cheaper credit for the private sector especially for setting up industrial units or reviving sick industrial units are hindering the future investment.
It is not surprising that an average Pakistani prefers to spend whatever he earns, rather than saving part of it for rainy days, retirement age or his/her children's college education.
As the world increasingly looks towards Asia for its textile needs, stagnant investment, high interest rates, and power shortages have placed Pakistan at a disadvantage against China, India, and Bangladesh.
The textile profiles of the above four companies compiled by All Pakistan Textile Mills Association (APTMA) reveals that China with textile exports of $212 billion is way ahead of other three countries followed by India with exports of $23.42 billion, Bangladesh $20.22 billion, and Pakistan $13.80 billion.
China is the largest producer and consumer of cotton in the world followed by India, while Pakistan is the fourth largest producer and third largest cotton consumer. Bangladesh hardly produces any cotton and is net importer of all textile raw materials.
"Pakistan should take cue from Bangladesh that is fast emerging as a major textile player after China," a leading textile exporter said.
He said Pakistani planners should realize that the success of Bangladesh was due to the enabling environment and facilitation provided to the Bengali entrepreneurs by their government. Successive governments in that country maintained the consistency in their policies towards their textile sector, he said adding that this sector is given preference in gas and electricity supplies.
According to him, zero-rated exports to the European Union did provide advantage to the Bangladeshi entrepreneurs, but the enabling environment facilitated them to make inroads in the United States market as well where they enjoyed no such advantage.
APTMA Group leader Ejaz Gohar said that the bank markup in Pakistan is the highest in the region. "The policy rate of the central bank is 12 percent, while the banks provide credit at a premium of four to six percent above the policy rates, which is impeding investment," he added. The discount rate in India is 8.5 percent and the banks are restricted by their central bank not to charge premium of over four percent, he said.
LCCI President Irfan Qaiser Sheikh said the availability of cheaper money to the business doing people was a must to bring down the cost of doing business and expedite the process of industrialisation that would ultimately result in curtailing poverty, inflation, and help in much-needed job creation.
How Pakistani merchandise could get a respectable place in the international market in the presence of such a high markup that neither has a parallel in the developed world nor in the region, he added. Ongoing economic scenario shows there is hardly any time left for economic managers of the country to help stop industrial closures and defaults. Therefore, the people sitting at the helm of affairs in the government and the SBP should understand well that a cut in interest rate would be a great favor to the economy, he said.
He said all the major economies despite having higher inflation rates have curtailed or are in the process of reducing interest rates to protect their respective economies.
A rate cut theoretically should spur increased lending and therefore economic growth, but Pakistan's looming energy crisis poses an obstacle towards growth and undermines any boost to the economy.
A weak rupee also makes it more expensive to repay foreign loans, a major concern for debt-laden Pakistan. The rupee hit a record low of over 94 last week. Inflation, devaluing currency, reduced per capita income, and high political instability are some of the major issues affecting its economy. These factors are leaving huge impacts on all sectors of the economy.
Inflation has developed to hyperinflation level. A sharp increase in the commodity prices and reduced employment opportunities has minimized the purchasing power of the middle class. Increasing interest rates are hampering the economic activities in Pakistan.