High interest rate restricts private-sector borrowing

Business forum urges SBP to review its policies, facilitate private sector

LAHORE: The All Pakistan Business Forum (APBF) has urged the State Bank of Pakistan (SBP) to review its policies and facilitate the private sector because credit offtake fell to Rs607.5 billion in fiscal year 2018-19 against Rs618.2 billion in the previous fiscal year owing to interest rate hike.

The key interest rate has been increased from 6.5% to 13.25% in just one year.

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Moreover, the government’s borrowing from the SBP has also increased considerably during the period, adding to inflationary pressures on the economy. APBF President Syed Maaz Mahmood was of the view that the private sector had nothing to borrow from financial institutions because banks preferred to park their money in risk-free government securities. “The flow of banking money is now going towards government papers, which will definitely hit economic growth and affect the investment landscape in the country,” he expressed concern.

Mahmood was of the opinion that the government’s shift from borrowing from the central bank to commercial banks would likely result in huge profits for the banks but that would hurt the overall economic growth.

Latest SBP data showed that the government borrowed Rs1.37 trillion in just one month of the new fiscal year 2019-20 against the net debt retirement of over Rs20 billion during the same period of last year. Mahmood pointed out that low credit offtake by the private sector meant lower domestic investment, which would restrict business activity and economic growth and promote unemployment in the country.

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The private-sector borrowing at the beginning of previous financial year was much higher than the preceding year but disappointing economic situation coupled with high interest rate discouraged it from borrowing additional funds in later months. The central bank justified the massive rate hike throughout the previous fiscal year, citing inflationary pressures.

“As weakness in private capital inflows continues to persist, the central bank should cut the policy rate to spur growth,” he demanded. “The reduction will instill confidence in the business community and propel the economy.” 

Published in The Express Tribune, September 1^st, 2019.

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