Business community terms hike in interest rate as anti-investment

KARACHI: The business community, already perturbed with unavailability of utilities and over-regulations, sharply criticized the 25 basis points increase in central bank’s interest rates to 10.25 percent and termed it anti-investment.

A lethargic fiscal policy and heightened borrowings by the government from the central bank are the reasons that have compelled the State Bank of Pakistan (SBP) to continue a hawkish stance.[the_ad id=”31605″]President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Daru Khan Achakzai said the expansion in private sector credit during the first half of the fiscal year was largely attributable to high cost of raw materials and continuation of capacity expansion in power and construction. “There has been no mentionable expansion in the industrial activities, which is evident from declining large scale manufacturing (LSM) numbers”.

“SBP continues to tighten monetary policy and increased policy rate by 4.50 percent in last one year despite evidences that the policy tightening strangulates investment in Pakistan and hampers economic activities,” Achakzai said.

Ahmed Lakhani at JS Global Capital said, “Ideally, the apex bank could have done without a rate hike at this point, as in its own words, key monthly indicators are showing visible signs of deceleration in domestic demand.  “SBP would have no option, other than to continue a monetary tightening stance in the future; unless of course, much needed fiscal measures are undertaken, providing relief on the monetary front.”

Investment to GDP ratio in Pakistan is very low i.e. 16.4 percent of GDP compared with 22.5 percent in 2007, while in India the investment to GDP ratio is 30 percent and in Bangladesh it is 31 percent.

President FPCCI termed the monetary policy stance as anti-investment, which had affected declined the economic activities in the first six month of the current fiscal year, evident from declining large scale manufacturing growth particularly textile industry, food-beverages, petroleum, iron, pharmaceutical, electronics and wood products.

Achakzai mentioned 10.25 percent was a very high rate compared to regional economies including India-6.5 percent, China-4.35 percent, Sri Lanka-9.0 percent, Thailand-1.75 percent, Indonesia-6.5 percent and Malaysia-3.25.

“Inflation is at 6.0 percent, which is high compared with 3.8 percent last year; but this inflation is cost pushed, which can’t be controlled through demand management policies”.

The major cause of rising inflation in the country was high cost of doing business particularly costly utilities, increase in the prices of industrial inputs and shortage of essential items of daily necessity.

“Government should focus on increasing the demand for credit by reducing interest rates and facilitate access to finance. Globally, monetary policy is aimed at protecting the value of the currency in co-ordination with the fiscal policy in order to achieve the objectives of macro-economic stability with constraining inflation and expansion of private sector investment,” he added.

President FPCCI further stated that the government should create its own fiscal space for financing its expenditures instead of borrowing from SBP and other institutions.

In a separate statement, President Lasbela Chamber of Commerce and Industry Maqsood Ismail also criticized the hike in policy rates adding it would discourage industrial expansion.

 

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