Further jump in key policy rate to deepen economic crisis: BMP


Anjum Nisar says unprecedented inflation, high markup reduce private sector borrowings
The Federation of Pakistan Chambers of Commerce and Industry’s Businessmen Panel (BMP) has warned the central bank of any further jump in the key policy rate, as it would deepen the economic crisis amidst record highest markup rate in the region.
FPCCI former president and Businessmen Panel (BMP) chairman Mian Anjum Nisar said that already unprecedented inflation and high markup rate have drastically reduced private sector borrowings during the outgoing fiscal year.
The State Bank of Pakistan (SBP) is all set to announce its latest monetary policy on Monday, with many experts fearing further hike in interest rate which is already touching the historic-high of 22 per cent.
He said that the central bank raised its key interest rate to 22 percent, exceeding investor expectations, as the cash-strapped country attempts to encourage the International Monetary Fund (IMF) to release critical funding. The key rate of the State Bank of Pakistan now stands at 22 percent, its highest level since October 1996.
Now, there are reports that the SBP would raise the interest rate by another 1 percent at the upcoming meeting of the Monetary Policy Committee (MPC) to please IMF. The Businessmen Panel (BMP) chief suggested the central bank to adopt an accommodative monetary policy stance, asking the finance minister to fulfil his commitment of reining in inflation besides cutting interest rate and strengthening the undervalued local currency against dollar.
The SBP has raised its key policy rate by 12.25 percentage points since April 2022, mainly to curb soaring inflation.
However, it held rates steady in June saying inflation had peaked at 38pc in the preceding month. But before the end of the month, it raised rates by 100 bps at an emergency meeting in an effort to secure IMF funds, citing slightly deteriorated inflation outlook.
In the Memorandum of Economic and Financial Policies (MEFP) that resulted from its talks with the IMF, Pakistan said it stands ready to consider further action at the next monetary policy committee meeting and subsequent ones until inflation and inflation expectations are on a clear downward path.
The SBP on its website says: “Monetary policy involves central banks’ use of instruments to influence interest rates and/or money supply in the economy with the objective to keep overall prices and financial markets stable. Monetary policy is essentially a stabilization or demand management policy that cannot impact long-term growth potential of an economy.”
However, the ground realities are totally different when it comes to monetary policy cannot impact long-term growth potential of an economy as the record-high interest rates and inflation skyrocketing the cost of production mean no one is ready to invest in productive sectors. Thus, this rate policy advocated by the IMF and pursued by top central banks will push Pakistan further into quagmire.
Demanding competitive interest rate at regional countries’ level, he said that the SBP’s stance of keeping monetary policy rate at 22 percent was already high compared to the markup rate of China, India and Bangladesh. He said that further monetary tightening and high current account deficit had sparked panic selling across the board, leading to the capital market’s massive tragedy. Mian Anjum Nisar said that the rate hike was a key requirement to get the IMF funding released. The MPC noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near term inflation outlook and a further upward drift in inflation expectations, as reflected in the latest wave of surveys.
In this context, the MPC emphasised that anchoring inflation expectations is critical and warrants a strong policy response. He said that while the CPI can potentially increase more with the fiscal actions related to subsidy removals and exchange rate weakness, the government needs to focus on improving the supply side urgently, especially of food and agricultural items. The government, for its part, should try to cut expenditure and increase revenue through taxes, and has allowed the rupee to depreciate. He stressed the need for reduction in the discount rate, arguing that low key policy rate is essential to make the Pakistani exports sector, as well as the local industry competitive.
Anjum Nisar said that in view of achieving exports target and stabilisation of the economy we need accommodative monetary policy measures by extending reduction in the policy rates so that the debt liability of the business sector is compensated through lower markup rate. The BMP chief said that trade and industry need continued support from the government in the form of lower interest rates, amid such external shocks, he suggested. He also demanded the immediate reduction in the electricity tariff, especially for the Small and Medium Enterprises (SMEs) as a first step towards a cut in the production cost, while the second and vital step towards this direction would be bringing discount rate to the regional level with a view to provide level-playing field, especially to the export industry. The FPCCI former president said the central bank should announce an initiative related to loans for the Small and Medium Enterprises (SMEs), as the sector has to show collateral to banks, which are always reluctant to offer them concessional credit.