But will it spur industrial growth?
The reduction in policy rates by 50bps to 9 per cent is likely to be welcomed by the business community. In April, APTMA had demanded reduction in interest rate by 150 basis points. Citing the earlier slashing of the rate from 13.5 to 9.5 per cent in the last one year, the Association had argued that this had resulted in ‘exponential’ textile exports which had grown by eight percent compared to the last fiscal. The State Bank has justified the decision by maintaining that it was needed to revive a sluggish economy. It is being maintained that an almost continuous and broad based deceleration in inflation over the last year has had a favorable impact on inflation outlook. How far these claims are genuine remains a matter for debate. The business community has generally supported the lowering of the bank rate in the past on the ground that the measure was needed to spur industrial growth. It has also been maintained that a lower rate has a positive impact on the non-performing loans as well.
What effect the measure will have is dependent on a number of other factors also. Lending rates may play a catalytic role in credit expansion and economic activity, but they are not the singular player in the arena of investment incentives which include feasible investment policies, better infrastructural facilities and the monetary and fiscal strategies. There is a perception that in case of Pakistan, the reduction in the lending rates has not always played the expected role in the expansion of credit. Governments have frequently squeezed the private investor out of the credit market. It remains to be seen if the present PML-N government acts differently.
Again, will the government manage to keep the inflation rate at the present level, if not bring it down further? The reduction in the lending rates may have a simultaneous effect on inflation rate since an increase in the extension of credit translates into an increase in the supply of money which can jack up the inflation rate. In case the inflation was to pick up, the rise in the cost of living would bring down the saving rate which is already the lowest in the region. Again would the reduction in bank rate not put a pressure on commercial banks to lower the interest on bank deposits to maintain their profitability? If the answer is yes, this might bring down bank deposits which are supposed to finance industrial growth. What is more, if the government was to go ahead with the proposal to allow it to peep into private bank deposits, this might encourage depositors to take out their money from the banking system. The government has to evolve a comprehensive policy factoring in other vital measures needed to give a boost to the economy. A single sparrow is not likely to make a spring.
