Pillar for revival of Economy

February 10, 2019

The recent increase of 25 basis points in the benchmark interest rate by the State Bank of Pakistan (SBP) was apparently a step toward economic stability of the country however, this increase on the other hand will give a boost to inflation, will also become reason in increase of credit cost for private sector and affect the growth of economy for sure. There is no doubt as the SPB also showed its conformity that the country economic slowdown will continue to persist a bit longer and here I want to mention that the reasons for such slowdown are rising in current  and fiscal account deficit.

Pakistan’s economic situation can be observed by the consecutive increase in the policy rate during current year, the SBP has made sixth consecutive increase in the policy rate taking it to peak level which is at least not in the interest of business activities and off course business community even the government has a stance that it working for ease of doing business in the country. SBP policy rate was 6 percent in January 2018 which has now gone up to 10.5 percent showing a cumulative increase of 4.5 percent in one year that would take a toll on business activities.

Hike in the interest rate also revealed the our manufacturing sector’s job market will also face the pressure, but more importantly the policy rate increased by State bank of Pakistan will affect the whole interest rate in the market, which means commercial banks will also increase their interest rates, making borrowing more expensive for individuals, businesses and the government.

Usually we can noticed that when the economy of a country is weak it keep the interest rate as low  interest rates encourage people to spend which increases the demand for goods and services. The low interest rate is also promoted businesses to raise manufacturing, production and sales, supporting more jobs and economic growth. To observe the Chinese model for economic success, we must control our interest rate as like China did, interest rates have always remained far below to GDP growth of China and this gap has been considered as a financial support that the Chinese government has provided to companies, which have been able to invest much more generously, as the cost of money has been relatively low.

Government needs to form and implement flexible monetary policy; it can effectively help the availability of easy credit facility for business enterprises which is also indirect facilitation to country job market. At least low interest rate system would bring many benefits as it would help in promoting business ventures, creating new jobs, enhancing exports and tax revenue and paving way for early revival of economy. We need to have low interest rates as our economy is weak.

Government needs to form and implement flexible monetary policy to effectively help the availability of easy credit facility for business enterprises.