More cut in interest rate possible

State bank of pakistan, multan branch

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Karachi —The recent half percent cut in the interest rate from 14 yto 13 percent, has come after a 150bp tightening cycle since November 2009, has brought a sense of relief for the stake holders who were looking at the depressed economic situation with long and grim faces. Even a cut of 50bps has brought a smile on the faces in the hope of further relief in the days to come.

The tightening of the monetary policy by the financial regulators is being pursued over years primarily to contain inflation which is and should be a matter of serious concern for the people as well as the policy makers for protecting the value of rupee currently sliding down sharply.

The increase in interest rate was allowed with a good intention to check the inflationary pressures, yet the financial regulators should have kept any eye on the side effects of the higher interest rate also. One of the major impacts of the higher interest rate is apparent from the ever increasing number of non-performing loans or rise in infected portfolio of the banking industry is a matter of concerns for the banking companies.

Majority of senior trade and industry leaders have welcomed the move of the State Bank of reducing the policy rate by 50 bps from 14 to 13.50 percent which they said cent is a right step in a right direction but this decision is not enough to back trade and industry on track as interest is still too high and should be brought to a single digit.

Prominent business leaders said that SBP’s decision to reduce bank rate by half percent is not sufficient to produce results in the face of unabated increase in power tariffs, oil and gas prices which altogether have rendered our products uncompetitive in the export market. It will be interesting to note that the decision of the central bank to reduce the policy rate by 50bps was the first cut in policy rate since November 2009 against the expectations of the stake holders as there was a general opinion that any relief in the form of softening of the monetary policy would come in the second half of the financial year 2012.

It is important to mention that the monetary policy announced by the State Bank of Pakistan last week has clarified regarding its decision to reduce policy rate on the comfort from its view on easing inflationary pressure in the financial year 2012 which is well within the government’s target and lower than estimate of 12.4% and adherence to borrowing targets in previous financial year.

In terms of future direction, the financial experts believe that the State Bank of Pakistan has the potential to lower discount rate by a further 50-100bp. However progress or otherwise depend on a variety of factors such as the stalled IMF program, Pak-US relations and international commodity prices are the key elements. Actually the slightly lower inflation and reduced government borrowing from central bank provide potential room to the financial regulators for easing the tightening stance.

The financial analysts are of the view that the State Bank of Pakistan would adopt a wait-and-see stance during first quarter of financial year 2012 on account of fiscal constraints higher inflationary pressure in the current Ramadan season and rising concern that the trend in borrowing from SBP and external account improvements could reverse later during the year, as the possibility of reversal in the government policy of borrowing from the banks cannot be ruled out. Hence much depend on how far and how long the government is adhered to the policy of fiscal discipline especially in terms of restricted borrowing from the Central Bank and the commercial banks during the current financial year 2012.

The State Bank of Pakistan has itself highlighted its concerns on potential demand pressures vis-à-vis higher rollover requirements, potential challenges to external sector facedby the Pakistan economy in case of US financial crisis and resultant global economic downturn and the need for government to broaden tax base and coordinate

Better with provinces to implement its plan of reduction in fiscal deficit in financial year 2012. In a nutshell, SBP is hopeful about FY12 inflation and borrowing targets i.e.

Commitment by the government to reduce fiscal deficit and contain borrowings from SBP. Meanwhile the Central Bank expects that the government would be able to meet its borrowing requirements as per the pre-announced T-bill auction target of Rs750 billion during first quarter of the new financial year.

The government would also adhere to its commitment of zero net borrowings from SBP and that the projected foreign inflows would be realized which however can be taken as twixt between lips and the cup story. What did the country gain out of a tightened stance of the central bank regarding monetary policy is a question to ponder upon by the financial regulators.

On the other hand the high interest rate has adversely affected the private sector demand for bank loans, increasing incidents of non-performing loans as stated earlier, almost zero activity in the highly vibrant sector of real estate and property development due to high cost of financing, drastic cut in car financing and consumer market. It is quite obvious that the oil pushed inflation cannot be governed with tightening of monetary policy. One of the effective solutions is to find import substitute for oil as the import bill on account of oil is feared to take a quantum jump of over $16 billion by the end of the current financial year.

In fact to control one aspect of the economy we are losing unlimited economic opportunities lying idle due to liquidity crunch faced by the large scale manufacturing sector to small and medium industries at a massive scale across the country. The net sufferer of the situation is the majority of the masses depending much of day to day earnings.


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