KARACHI – Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Vice President Khalid Tawab has expressed serious reservations of the State Bank of Pakistan’s (SBP) new Monetary Policy to be announced on January 29; it is anticipated that the discount rate will be raised by a further 50 basis points. He said that the SBP continues to operate a tight monetary policy despite clear evidence that such policy strangulates investment and trade in Pakistan and has hampered the growth of manufacturing in Pakistan. Although manufacturing sector growth has begun to recover this year, it is still lower than FY07 and FY08 levels, due to lower bank credit made available to the private sector of Rs 112.90 billion, as compared to Rs 369.85 billion in FY08. He went on to say that Pakistani banks will face the spectre of rising non-performing loans (NPL) in the new calendar year, as higher lending rates and a weak economy continue to deal a double blow to borrowers’ payment capacity.
He insisited that an interest rate of 14 percent is one of the highest in the world compared to India at 6.25 percent, China at 5.56 percent, Thailand at 1.5 percent and South Korea at 2.25 percent, respectively. Moreover, the banking spread in Pakistan is 7.6 percent, which is the highest in the world, and this makes it impossible for industry to survive and compete in the international market.
Tawab stated that the catastrophic floods had serious implications for macroeconomic stability and the fragile prospects for growth. It is expected that the floods will reduce economic growth rate by between two and three percent. He said that in this scenario, when private sector investment is needed in the country, SBP is using a tight monetary policy to compensate for the government’s borrowing for financing its current expenditures. Furthermore, NPLs now stand at 9.1 percent of total gross loans, which is relatively higher than other Asian countries. He cited the examples of India with 2.3 percent, China 2.4 percent, Malaysia 4.8 percent and Thailand 5.7 percent, respectively. It was noted that this needs to be trimmed to allow for sustained economic growth.
Additionally, he indicated that SBP justifies the higher interest rate in Pakistan on the basis of raging inflation. He insisted that the nature of inflation is not demand pull and therefore cannot be contained by tight monetary policy and is instead supply side inflation. This entails that the major cause of rising prices is an increase in the prices of industrial inputs and shortage of essential items of daily necessity. All of these are price inelastic products and monetary policy can not control their prices.
Tawab advised the SBP to focus on boosting the demand for credit by reducing the discount rate to a single digit figure.
