Pakistan: Central bank must cut interest rate

Pakistan, already suffering from cost pushed inflation faces two challenges. The Monetary Policy Committee (MPC) has to make a difficult decision of cutting interest rate for making debt servicing sustainable.

The business community is already jittery due to likely introduction of new taxes, no reduction in interest rate, but more distressing hike in electricity and gas tariffs.

Analysts believe, Pakistan’s current account just can’t be improved without restoring competitiveness of the local manufacturers.

During this past week, Moody’s statement suggesting a status quo in the upcoming MPC meeting exerted some pressure on the stock market.

Looking ahead, the upcoming MPC meeting on June 10 will be in the spotlight, with any rate cut expected to shift the market’s focus towards cyclical sectors.

More than two years into the steepest interest-rate tightening cycle in decades, central banks around the world are grappling with how fast to unwind the policy. Policymakers from South Korea to Canada are weighing progress on slowing inflation, and some have started cutting rates.

Policymakers in Latin America have been trimming since earlier this year. While that all marks a major milestone, price pressures have proven stubborn, a strong dollar has roiled developing nations and geopolitical tensions have added a layer of uncertainty to the post-pandemic economic recovery.

US Federal Reserve officials will meet next week and are widely expected to hold interest rates steady as the US economy hums along and the labor market keeps firing on all thrusters. 

The Labor Department data this week suggesting last year’s payroll gains might not have been as robust as first counted, there’s now the risk that Fed Chair Jerome Powell and his colleagues could keep monetary policy too tight for too long.

Even as the Fed’s central bank peers diverge (the en-vogue term for the current unwinding cycle), rate cuts by the European Central Bank and the Bank of Canada “are less bold departures and more like components of a mosaic,” Daniel Moss writes in Bloomberg Opinion. “Harmony has been breaking down for a while.”

 

Business community slams hike in interest rate

While slamming another 100 basis points (bps) hike in the benchmark interest rate to a record 21%, the business community on Tuesday questioned the government’s approach of fighting inflation by jacking up lending rates saying the strategy has failed to produce desired results but slowed down economic activities.

“The entire business community has refused to accept the 100 bps hike in the policy rate to an all-time high at 21%,” announced Federation of Pakistan Chambers of Commerce and Industry President Irfan Iqbal Sheikh.

In a statement, he said the benchmark interest rate has risen by a whopping 1125 bps in the last 14 months but failed to check inflation. “If that is not the governance and regulatory failure, then what would the failure look like to move the government for a course correction? he asked.

The trimming of growth projections by both the World Bank and the Asian Development Bank to less than half a percent for FY23 is the direct outcome of the regressive, IMF-dictated and recessionary monetary policy which has dried out the access to finance for businesses, the FPCCI chief lamented.

The country’s exports have posted negative growth for the seventh month in a row and the two major industries like textile and IT have persistently been facing a decline.

He said the 21% interest rate is far higher compared to what is prevailing in China, India and Bangladesh at 2.75%, 6.5% and 6% respectively.

Inflation in Pakistan, however, appears to be deep-rooted and it mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs and other prescribed measures under the IMF program, he noted.

Despite raising the SBP policy rate to 21% in the current month, inflation remained stubbornly high and a further surge is a manifestation of an utter failure of the monetary policy, the FPCCI president observed.

Pakistan Business Council chief executive Ehsan Malik said the latest hike in the policy rate, much like other recent rises, would do nothing to control cost-push and devaluation-led inflation.

“Nor in this politically turbulent time will it buffer the value of the rupee,” he added. On the other hand, he said it would raise the cost of borrowing for the formal sector already suffering from low capacity utilization due to an import crunch.

“It is time that the State Bank of Pakistan (SBP) adopts a more differentiated stance on the use of monetary policy,” Ehsan said.

SITE Association of Industry President Riaz Uddin said the hike in the interest rate would further increase the cost of doing business which is already hit by rupee devaluation against the dollar, rising gas and power bills, dollar crisis, shutdowns of various industries due to raw material shortage, etc.

Courtesy: Dawn