The central bank is rather clear in its stance on the discount rate: they won’t lower it till there is a significant reduction in the rate of inflation. As Governor SBP Shahid Hafiz Kardar explained in the pre-budget seminar organised by this paper yesterday, the central bank sees a connection between the two variables and is adamant on maintaining the ratio. He gave examples of other countries to drive home the point. Malaysia’s inflation rate of 3 percent to its discount policy rate of the same percentage. South Korea: 4.7 to an interest rate of 3.7. India: 8.6 to 7.25. The list went on.
Even without the examples, the theory adds up. Hiking interest rates to suck excess liquidity off the money market has been a tried and tested methodology of fighting inflation. Big business thinks otherwise. First, it thinks using high interest, as a tool, as a counter to inflation has been used far more than it is worth; there isn’t, they say, that much of an excess in the money supply. The problem is of the cost-push variety. The captains of industry and commerce
claim that the high discount rate makes credit
provision exorbitantly difficult and is bad for the business environment.
Analysts say it could have been worse. The central bank could have even hiked the rate, but didn’t. Its decision not to hike the rates was premised on a perceived success by the government in reining in inflation. There is something to be said for the finance ministry’s efforts to curb price hikes, most notably, making solid efforts to limit borrowing from the central bank which means basically printing new notes.
The SBP monetary policy statement, which came
out the other day, warned the government that it will not be able to replicate the rather impressive export statistics of the current fiscal in the next. That will eventually play out in the money markets again. All eyes are on the next budget. If the government incentivises exports and controls spending (alternatively, raises revenues), the central bank might have more leeway
in the future to cut the business community some
slack on the interest front.
