Reduction in interest rates: inflationary indicators decline sharply

Attention: open in a new window. PDFPrintE-mail

The inflationary indicators have registered a sharp decline with lowering down of interest rate by the State Bank of Pakistan and another reduction of 150bps, as demanded by the APTMA leadership, would ease down the inflationary pressure further in the country. The last 18 months aggressive steps by the State Bank of Pakistan have already arrested the abnormal rise in the Non Performing Loans (NPLs). During this period, the industry has borrowed Rs 107 billion on long term basis and Rs 520 billion on short term basis. Total financing on machinery by the industry was Rs 41 billion during last six months once the SPB has brought down the interest rates in the country. It is for the first time in last five years that the industry has registered exponential growth due to reduction in interest rates and it expects further lowering down of the rates in line with the regional competitors.

It is also worth noting that the regional competitors including India, Bangladesh and China are offering 7.5 percent interest rate to their industrial sectors against Pakistan where still the banks are charging 9.5 percent mark-up. The industry circles are, however, very critical to the banking industry for not dropping the spread between lending and borrowing rates, which has dropped merely by 1.12 bps against 4 percent reduction in the interest rates over the last 18 months.

While demanding reduction of 150bps in the interest rate, the industry circles said it would improve the businessmen confidence in the country. Interestingly, the Consumer Price Index was 15.5 percent in 2010 when interest rate was 14% besides 24.7 percent of Wholesale Price Index and 22.5 percent of Sensitive Price Index respectively. Soon the SBP reduced the interest rate, the pressure on all these three inflationary indicators eased down correspondingly. It may be noted that the interest rate has been slashed by 4 percent in last 18 months that has brought the SPI from 11.9 percent in 2010 to 6.2 percent in March 2013.

It is the right time to introduce a reduction of 150 basis points in the interest rate to take the mark up to 8 percent in line with the aggressive steps taken by the SBP since August/October 2011. APTMA has already been mentioning that it was not cost-push but demand-pull inflation. The industry also approached the SBP policymakers and deliberated upon the point, leading to substantial reduction in interest rates. Even now, the APTMA believes that there should be a proportionate equation in between the growth, employment and inflation and it demands the government to get the industry back to the growth trajectory.

According to the industry circles, the industry would not be able to sustain if there is not substantial reduction in interest rates, especially when energy crisis has already hit hard to the productivity of the industry at large. It is a million dollar question that how the industry can survive high interest rate regime in the country. That is why, majority of the industrialists is thinking seriously of how to survive than how to expand right now. The reason behind this approach is lack of growth in the industrial sectors and it is duty of the policymakers to save the industry, particularly in the province of Punjab. Though, the industry in Sindh is also not in a comfortable position due to worst law and order situation. But the industry in Punjab is paying double cost of doing business in the absence of smooth energy supplies.

Courtesy: Business Recorder

Forex open Market rates & comments Archive

Login Form