Industry concerned over tight monetary policy

Says high interest rate impedes investment, trade .

KARACHI: Vice President Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Khalid Tawab has expressed concern over expectations that the State Bank of Pakistan, in the new monetary policy to be announced on January 29, will increase the discount rate by a further 50 basis points.

He said that the SBP continues to pursue a tight monetary policy despite clear evidence that it has impeded investment and trade and has slowed down the growth of manufacturing sector.

He said that 14 per cent interest rate is one of the highest in the world. In India, it stood at 6.25 per cent, China at 5.56 per cent, Thailand at 1.5 per cent and South Korea at 2.25 per cent.

He said that the SBP justified the higher interest rate because of the increase in inflation, but pointed out that the nature of inflation in the country is not demand-pull, which can be controlled through a tight monetary policy. “It is a supply-side phenomenon, whereby the major cause of rising prices is an increase in prices of industrial inputs and shortage of essential items of daily use. All of these are price-inelastic products and monetary policy cannot control their prices,” he said.

Tawab advised the SBP to focus on increasing the demand for credit by reducing the discount rate to single digit.

Published in The Express Tribune, January 21^st,  2011.