‘High interest rate will destroy economy’

Business chambers are in a state of panic and shock as they are speculating on how to cope with the fallout of a surprise 250 basis points rise in the benchmark interest rate by the State Bank of Pakistan (SBP).

In a statement on Saturday, Federation of Pakistan Chambers of Commerce and Industry (FPCCI) President Irfan Iqbal Sheikh expressed his profound disappointment and concerns over the unexpected and massive hike in the key policy rate.

He underlined that its repercussions would be witnessed in economic activities, business viability besides hurting exports in the absence of any governmental support.

Drawing comparisons to the policy rates of the region, he mentioned that the country was already facing a huge disadvantage as the interest rates in the regional countries were lower than Pakistan’s.

Giving examples, he said that the key policy rate in Malaysia stood at 2%, China at 3.7%, India at 4% and Bangladesh at 5%.

“If the interest and export refinancing rates are not decreased drastically in Pakistan, then we will not be able to compete with the regional countries,” he emphasised.

Sheikh noted that the current wave of inflation had nothing to do with the policy rate of the SBP “rather, it is due to political uncertainty and lack of directions in economic policies”.

“The inflation in Pakistan is being witnessed due to supply-side disruptions and has nothing to do with the interest rate,” he added.

He recalled that the business community had been demanding the concerned authorities to gradually decrease the interest rate in order to ensure availability of capital to businesses at lower and affordable rates.

However, instead of bringing it down from the previous level of 9.75%, the SBP increased it by a massive 250 basis points to 12.25%

“This will put a halt to the economic and commercial activities in the country.”

Sheikh held the view that rupee-dollar parity, uncertainty in political and economic environment and interest rate hikes “would totally crush the small and medium enterprise (SME) sector”.

This would adversely impact the SMEs cost of doing business, access to capital and access to foreign exchange which would make it hard for them to remain profitable.

“If the authorities do not interfere immediately, there will be large scale bankruptcies, non-fulfillment of export orders, massive loss of employment opportunities and dent to tax revenue,” he cautioned.

He called upon the authorities to instantaneously start a consultative process with all the stakeholders to find a practical solution to escape the current crises.

Echoing his views, Islamabad Chamber of Commerce and Industry (ICCI) President Muhammad Shakeel Munir urged the SBP to immediately revisit and withdraw the increase in the benchmark interest rates as the increased rates would negatively impact the economy.

He termed the hike of 2.5% in the policy rate harsh measure and stated that it would badly affect the growth of businesses and dent exports.

He noted that the interest rate in Pakistan was the highest in the region, giving the example of Thailand which was at 0.5% and Hong Kong at 0.75%.

He cautioned that the massive hike in the policy rate would hit all sectors of the economy and spark further downfall of trade and industrial activities.

“Our economy is already facing mammoth challenges including rising inflation, sharp currency devaluation, unbearable foreign debt, depleting foreign exchange reserves, growing fiscal imbalances and dwindling foreign direct investments,” he lamented.

“In such circumstances, the government should have made a significant cut in the benchmark interest rate to promote ease of doing business in order to revive business and economic activities,” he underlined.

Munir emphasised that the hike in interest rate would make the credit cost non-viable for the private sector owing to which the efforts to expand current businesses and make new investments would face massive hurdles.

He stressed that the SBP should reconsider its decision and reduce the interest rate to make credit cost affordable for business class.