Businesses Split Over Interest Rate Reduction in Pakistan
Karachi: The State Bank of Pakistan (SBP) is going to be in a dilemma regarding whether it should reduce interest rates or not. On one hand, the business community is demanding a substantial 500 basis points reduction, whereas multinational firms are advising a cautious approach.
The imports in Pakistan are on the rise, but it’s anybody’s bet how tariffs will influence exports, particularly to the US. The world economy is in question, and the pattern of increasing commodity prices cannot be taken for granted. Some people feel that reducing interest rates may put pressure on Pakistan’s currency, the rupee.
Abdul Aleem, the Secretary-General of the Overseas Investors Chamber of Commerce and Industry (OICCI), cautioned against acting in haste to cut the rate. He suggested a modest cut of 0.5% at best and said the SBP should hold off until the next policy meeting before taking any further action.
Discontent Among Businesses
Atif Ikram Sheikh, FPCCI President, was not satisfied with the monetary policy. He opines that the 100 basis points reduction in the policy rate on January 27 was inadequate, given the low inflation of 1.5% in February and 2.4% in January. According to him, the policy rate of 12% is excessive about the core inflation rate.
Sheikh demanded a sharp 500 basis points reduction in the next Monetary Policy Committee (MPC) meeting scheduled on March 10. In his view, this action would more appropriately realign the monetary policy with that of the Special Investment Facilitation Council (SIFC).
Analysts expect core inflation to remain between 1% and 3% for the April- June quarter, thanks to declining prices and softening inflation pressures. Crude oil prices are also likely to remain firm, remaining below $70 a barrel as OPEC nations continue to produce enough oil.
Atif Ikram Sheikh proposed that with stable oil prices, Pakistan has the potential to cut interest rates. He pointed out that this would lower the cost of capital and enable Pakistani businesses to compete internationally.
Advantages of Reduced Interest Rates
Other business leaders, like Saquib Fayyaz Magoon from FPCCI, believe that a lower interest rate would make loans more affordable for businesses. This would also help exporters compete better in international markets. Faisal Moiz Khan, Chief of the North Karachi Association of Trade and Industry (NKATI), also urged the SBP Governor to reduce the interest rate to 5%. This, he believes, would help the industrial sector grow and create more job opportunities for Pakistan’s youth.
Increasing Debt and the Call for Reform
Domestic debt servicing in Pakistan has risen by 50.4% from Rs 4.8 trillion to Rs 7.2 trillion, while the policy rate is still on the higher side. It further pressures the national budget and aggravates fiscal imbalances even further.
Ehsan Malik, CEO of the Pakistan Business Council (PBC), believes that the SBP will not change the policy rate for the time being. Although inflation is declining, the MPC wishes to maintain a 4% positive interest rate for the time being, considering external factors like forex reserves and the outcome of the IMF review.
