Private sector’s hopes of cut in policy rate diminish

KARACHI: The business community has expressed reservation over the key policy rate and said maintaining mark-up at 12 percent by State Bank of Pakistan (SBP) would further fuel the non-performing loans (NPLs) and unemployment in private sector. Members of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Karachi Chamber of Commerce and Industry (KCCI), All Pakistan Textile Mills Association (APTMA) and other trade organisations were expecting a reduction in interest rate to single digit, as the industry was braving losses on present level amid high cost of energy and its crisis in the country. FPCCI and Sindh Assembly Member Rana Abdul Sattar said the heavy government’s borrowing at the cost of the growth of private sector was hampering the growth. In such a situation the private and industrial sector should have been provided relief by SBP and policy rate should be cut by 3-4 basis points up to a single digit. The private sector was losing capability of production due to high financial cost and less liquidity, he added. APTMA members said the SBP’s approach on curbing inflation through high mark-up, as major borrower of the banks was the government and not the private sector. He said absence of surplus liquidity in the market was the prime reason behind lack of investment in the industry. The population, on the other hand, was multiplying fast, which means high rate of unemployment in the absence of expansion plans of industry due to high interest rate. He said reduction in bank mark-up to 7.0 percent could encourage fresh investment in the industry particularly in textile industry and increase jobs and exports of the country. The SBP decided to keep the policy rate at 12 percent. The current decision shows SBP was least interested in the growth of industrial sector rather it kept helping heavy borrowing of the government. The step will not help to control the inflation to average 10 percent in fiscal year 2012 (FY12), down from 13.9 percent in FY2011. This policy rate cut is an eyewash, PYMA member Ghulam Rabbani said. Cut to a single digit could have provided great hope to exporters and importers and help to hold back the sharp decline in investment spending, which declined to 13.4 percent in FY11 (ended June 2011), the lowest levels since 1974, he added. Keeping the rate to 12 percent will not help much to improve the transmission of monetary policy changes to market interest rates. Sharp Pakistani rupee depreciation over the last three years has been a key inflation driver. Standard Chartered Pakistan’s Sayem Ali SBP should continue to monitor developments in the fiscal sector and those pertaining to foreign financial inflows to gauge risks for macroeconomic stability. SITE Association of Industry hoped the interest rate should have been brought down to a single digit, which was need of the day.