Pakistan industry seeks further interest rate cut
Central bank wants the sector to cut cost of production
Pakistan’s central bank has held the discount rate at 5.75 per cent mainly to strengthen the ongoing economic uptick and thwart the feared threat of inflation that may follow a big push up in international oil and commodity prices.
One positive indicator of the current situation is that commercial banks are projected to enjoy larger profits, as both deposits and lending is going up.
However, the industry and business leaders and exporters are demanding that the interest rate should be cut further to help them compete internationally.
Now the commercial banks, the financial sector, the stock market and businesses and industries will have to work with this benchmark interest rate that was recently announced by the State Bank of Pakistan (SBP). However, the entire business community says it is dismayed over the continuation of the 5.75 per cent interest rate. These range from the top business leader Federation of Pakistan Chambers of Commerce and Industries (FPCC&I) to the powerful All Pakistan Textile Mills Association (APTMA) and from Cotton Ginners Association to All Pakistan Marble Mining & Exporters Association to crucial exporters, the Surgical Instruments Manufacturing Association of Pakistan.
“The interest rate should have been cut by at least 50 basis points in order to help us reduce domestic prices and undertake larger export more competitively,” says FPCC&I’s official spokesman.
“The industrial and commercial units should cut down their cost of production and become more efficient, rather than criticizing the monetary policy that provides the lowest interest rate in the last 43 years,” counters the SBP spokesman. While this dialogue will continue between the two sides with each one asking the other to “do more”, let us have a look at what the monetary policy says.
“The inflation expectations in the current FY-17 continue to remain well anchored. This has been largely due to the near absence of any major supply-side pressures. However, rising real incomes, in a low interest rate environment since FY-14 are indicating signs of a pick-up in domestic demand, which is broadly reflected in the core inflation measures,” Mohammad Ashraf Wuthra, the governor of SBP, said.
The Monetary Policy Committee of SBP had, earlier, approved the interest rate to continue at 5.75 per cent.
The SBP says the improving consumer confidence, as depicted by a survey jointly conducted by Karachi Institute of Business Administration and SBP in March this year, indicates “a further increase in the consumer demand”.
It says: “The real economic activity continues to gather pace on the back of better agricultural output. It indicates increase in key large scale manufacturing sector, and a healthy uptick in credit to the private sector. “This expansion is helped by a range of factors, including low cost of inputs, upbeat economic sentiment, improved energy supplies, and China-Pakistan Economic Corridor related investments,” Wuthra said. The central bank claims that its “prudent monetary policy stance has translated well into low and stable market interest rates, which incentivized the private sector to borrow from the commercial banks to finance their business and investment activities which is supported by the commercial bank operations”.
The commercial bank credit to the private sector rose by Rs349 billion during the eight-month period of July-February of FY17 — up from Rs267 billion in the same period of FY-16. The fixed investment by the private sector, at the same time, rose by Rs159 billion — up from Rs102 billion in the like period of the previous year.
All this sounds good, but what is the outcome? Exports are still not growing. The remittances sent by Pakistanis working abroad also saw a small decline. It led to the current account deficit widening to $5.5 billion during the seven months from July to February of FY-17. Low textile export is a big worry.
The Pakistan Bureau of Statistic (PBS) has reported that textile exports have gone down further. In the eight months to February of FY-17, “the overall export proceeds went down 3.9 per cent to $13.317 billion”. This is despite the fact that Prime Minister Nawaz Sharif had late last year announced a Rs180 billion export subsidy package to promote textiles and four other key items.
Javed Bilwani, chief of Pakistan Apparel Forum, says: “We demand lower interest rate to cut the cost of production to compete internationally, including against our key rivals India, Bangladesh, Sri Lanka and Thailand.”
Sanaullah Khan, president of All Pakistan Marble Mining & Processing Industry & Exporters Association, says: “The interest rate cut can help export-oriented industrial sectors as they need commercial bank loans and cash from other sources at reasonable rates.”