Unchanged interest rate

Availability of working capital at such high rate led to a growing disinterest of business community in bank borrowing

Editorial January 30, 2020

If the government had allowed the very many big and small businessmen and traders in the country to come up with just one wish for it to fulfil, they must have been unanimous in calling for a cut in the interest rate. There can be no two opinions about that. For quite some time now, the demands of the business community — apparently convinced that the bailout agreement with the IMF does not leave the government with much room to provide them any financial relief — had narrowed down to this single item. During their latest meeting with the Prime Minister, held in Karachi on Monday, the businessmen of the metropolis strained every nerve for seeking an assurance for at least a cut of 100 basis points in the interest rate, but in vain.

The SBP announced its monetary policy for the next two months on Tuesday, keeping the interest rate unchanged at 13.25%. The central bank has maintained the rate at this level since July 2019 onwards, having earlier raised it continuously for a year or so. From 7.5% at the time the PTI government took over in August 2018, the SBP policy rate has almost doubled. A policy rate of 13.25% means that the effective rate of borrowing from commercial banks has touched 18% as these banks normally charge a premium of 3% to 6% on top of the interbank rate.

The availability of working capital at such a high rate has led to a growing disinterest of the business community in bank borrowing. A 71% decline in private-sector borrowing in the first five months of the ongoing fiscal year is reflective of this depleting interest — something that has hampered investment by local businessmen and choked the economy. The government is heavily depending upon the ‘hot money’, for which a high interest rate serves as a big lure. A cut in the rate would mean lower profits on the portfolio inflows and a possible flight of the ‘hot money’. This explains the status quo on the SBP’s monetary policy.

Published in The Express Tribune, January 30th, 2020.

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