Economic slump stops interest rate hike

[LahoreEstate]

KARACHI, Jan 21: Despite pressure from the International Monetary Fund, the government has signalled that the interest rates would not be increased in the new monetary policy, to be announced on Jan 31.

The private sector which is under tremendous stress in Pakistan, heaved a sigh of relief as the rumour that the interest would not be increased any further was formally endorsed by the government before the official announcement of the policy by the new governor of the State Bank of Pakistan.

However, the federal information minister Sherry Rehman told newsmen in Islamabad on Wednesday that the increase in the interest rate had been deferred. The increase was expected at the end of this month.

The State Bank had increased policy discount rate by two per cent to 15 per cent in November 2008 which was in accordance with the IMF conditions.

The country negotiated a total discount rate increase of 3.5 per cent in two phases. The second increase of 1.5 per cent was expected by the end of this month.

However, the 15 per cent policy interest rate sharply reduced the economy’s ability go grow under crushing pressure of 15 per cent which translated into banks’ lending rate above 20 per cent.

Export-based manufacturing sector which has been facing impact of recession in the markets of developed economies, found it difficult to survive under such a high interest rate, and the roar against it was heard across the country.

“No further increase in interest rates is a good news but it needs to be cut down at least by three per cent,” said Aamir Aziz, a knitwear exporter who said his exports remained one-third of what was exported last year.

Analysts were expecting no change in the monetary policy regarding the interest rate but their findings included the inflation behaviour. They said main inflation has started sliding which means there is no need to increase interest rate.

The advisor to the Prime Minister on Finance and Economic Affairs had a different opinion as he had said in November that the interest rates would be increased if core inflation did not come down. However, the core inflation still is 18.8 per cent.

Banks said private sector credit off-take has fallen as money became costlier for borrowers.

Analysts said costlier money stops new ventures, new plans and expansion of businesses.

The quick negative response to high interest rate came from the auto sector which is reportedly losing ground as prices are going up while money is costlier.

Reverse equation brought slump to the auto sector by 48 per cent in terms of sale. At least 10,000 lost jobs.

The textile sector is showing visible signs of poor growth that hits exports as it earns over 60 per cent foreign exchange for the country and minimises the risk of current account deficit.

“Banks are also in trouble as their income dropped and non-performing loans (NPLs) are increasing,” said a senior banker.

He said a number of major factors are the reasons for no increase in the interest rate.

He, however, expressed surprise as to why decision on interest rate was disclosed much earlier. The banker said that the SBP should be allowed to announce the interest rate policy.

http://www.dawn.com/2009/01/22/ebr2.htm