Industrialists Call for Single-Digit Interest Rate Cut

December 14, 2024 Mahi Bukhari

Introduction

In light of Pakistan’s growing economic challenges, leading industrialists and traders have called upon the State Bank of Pakistan (SBP) to reduce the current policy rate to single digits. This request comes ahead of the upcoming Monetary Policy Committee (MPC) meeting, with a strong demand for a 5% cut to ease borrowing costs and stimulate economic activity. According to industrial leaders, the prevailing high interest rates are stifling private sector credit growth and hampering the overall economic growth of the country.

This article explores the reasons behind the call for a reduction in the policy rate, the impact of high interest rates on various sectors, and the potential benefits of reducing rates in line with regional peers.

Industrialists’ Concerns Over High Interest Rates

Impact on Private Sector Credit Growth

Muhammad Kamran Arbi, an eminent industrialist, has voiced his concerns regarding the current interest rates. He believes that high borrowing costs are suppressing both long-term and short-term financing. While high interest rates benefit those with large deposits, this comes at a significant cost to the overall economy. Arbi suggests that lowering interest rates would reduce the returns for deposit holders, encouraging them to explore alternative investment opportunities. This, in turn, would help bring idle cash back into circulation, thus stimulating economic activity.

The industrialist further highlighted that lower interest rates would make it easier for businesses to access credit, which is crucial for their growth and sustainability. The current climate, where credit is expensive and difficult to obtain, is proving to be a barrier for businesses to thrive, particularly for small and medium enterprises (SMEs).

Discrepancy Between Stock Market and Economic Conditions

Farooq Shaikhani, a prominent industrialist and former president of the Hyderabad Chamber of Small Traders and Small Industry (HCSTSI), also expressed dissatisfaction with the government’s economic policies. Shaikhani pointed out that while the stock exchange is performing well, interest rates remain prohibitively high, which creates a mismatch between market performance and real economic growth.

He noted that despite claims of record-low inflation at 4.9% and improved trade deficits, these benefits have not trickled down to the general public or small traders. For many, inflation and the cost of living remain unbearable, and borrowing costs for small businesses continue to be unaffordable. The discrepancy between the official economic figures and the reality on the ground raises concerns about the accuracy of these statistics and whether they truly reflect the state of the economy.

Shaikhani emphasized that the government must ensure that economic growth benefits not only large corporations but also small industries and ordinary citizens. To achieve this, policymakers must implement more effective policies that directly address the challenges faced by businesses and the general public.

The Call for a 5% Cut in the Policy Rate

Siraj Sadiq Monnoo’s Proposal for a 400-Basis-Point Reduction

Siraj Sadiq Monnoo, spokesperson for the Landhi Association of Trade and Industry (LATI), has been vocal about the need for a substantial reduction in the policy rate. Monnoo has called for a 400-basis-point cut, pointing out that the recent decline in inflation to 4.86% in November 2024—the lowest in years—makes this adjustment essential.

The policy rate, currently at 15%, remains high by regional standards. In countries like India (6.5%), Vietnam (4.5%), and Bangladesh (10%), interest rates are significantly lower, making it easier for businesses to access credit. Monnoo believes that reducing Pakistan’s policy rate would align the country’s real interest rates with sustainable levels, thus easing borrowing costs for both businesses and consumers.

Economic Benefits of Lower Interest Rates

Monnoo explained that high interest rates have been a major obstacle to private sector growth. By restricting access to credit, businesses face difficulties in expanding operations, creating jobs, and contributing to the economy. In comparison, lower interest rates would encourage borrowing, investment, and consumer spending, all of which are crucial for economic recovery.

Furthermore, high interest rates have added significant pressure to Pakistan’s fiscal situation. Domestic debt servicing has risen sharply, with the government now spending more on servicing its debt than ever before. This has exacerbated fiscal deficits and budget imbalances. By lowering interest rates, the government could reduce its debt servicing costs, freeing up resources for more productive uses, such as infrastructure development and social welfare programs.

The Need for a Responsive Monetary Policy

The current economic landscape calls for a more flexible and responsive monetary policy. The SBP has already reduced the policy rate from 20.5% to 15% since the start of the fiscal year, but these reductions have not been sufficient to match the lower inflation rates. In January 2021, when inflation was at 5.65%, the policy rate was set at 7%. This suggests that a more responsive monetary policy could have a significant positive impact on the economy.

How High Interest Rates Affect Pakistan’s Economy

The Effect on Small and Medium Enterprises (SMEs)

SMEs form the backbone of Pakistan’s economy, providing jobs and contributing to economic development. However, these businesses are particularly vulnerable to high interest rates. With the cost of borrowing so high, SMEs are finding it increasingly difficult to access the capital they need to grow and expand. As a result, many are stagnating or even shutting down, leading to job losses and reduced economic activity.

Increased borrowing costs also affect the cost of production for SMEs, which in turn impacts the prices of goods and services. This not only raises living costs for consumers but also makes local businesses less competitive compared to international companies that can access cheaper credit.

The Burden on Consumers

High interest rates not only affect businesses but also have a direct impact on consumers. Individuals who rely on credit to purchase homes, cars, or other goods are burdened with higher repayments, reducing their disposable income. This leads to decreased consumer spending, which is a critical component of economic growth. When consumers are unable to spend, businesses experience lower demand for goods and services, further stifling economic recovery.

The Impact on Inflation

While high interest rates are often used to combat inflation, they can also have an unintended effect. The cost of borrowing increases, leading to higher costs for businesses, which then pass those costs onto consumers in the form of higher prices. This can create a vicious cycle where inflation continues to rise, even as the central bank raises interest rates to try to control it.

Conclusion: A Call for Immediate Action

The industrial sector’s call for a reduction in the policy rate is rooted in the need to stimulate economic activity, provide relief to businesses, and ensure that economic growth benefits all sectors of society. While inflation remains a concern, the decline in inflation over recent months provides an opportunity for the SBP to adjust the policy rate and align it with current economic realities.

The Pakistani economy is at a crossroads. To foster sustainable growth, the government and SBP must work together to create a monetary policy that supports businesses, stimulates credit growth, and ultimately leads to higher living standards for all citizens.

FAQs

1. Why are industrialists urging the SBP to lower the interest rate?

Industrialists are urging the SBP to reduce the interest rate to single digits to stimulate economic activity. High borrowing costs are seen as a major barrier to credit growth and business expansion, especially for small and medium enterprises (SMEs).

2. What would be the potential impact of reducing the policy rate on businesses?

Lowering the policy rate would make borrowing more affordable for businesses, enabling them to invest, expand, and create jobs. This would also lead to increased consumer spending and overall economic growth.

3. How do high interest rates affect consumers?

High interest rates lead to higher borrowing costs for consumers, making it more expensive to finance homes, cars, and other goods. This reduces disposable income and can lead to decreased consumer spending, which negatively impacts businesses.

4. What has been the effect of high interest rates on SMEs?

SMEs are particularly affected by high interest rates, as they struggle to access affordable credit. This hampers their ability to grow and expand, leading to stagnation and potentially job losses.

5. How do lower interest rates help control inflation?

Lower interest rates can help reduce production costs for businesses, making goods and services more affordable for consumers. This can reduce the overall price level and contribute to controlling inflation.