A gamble with the economy

A better strategy might have been a staggered approach in reduction of interest rates, balancing inflation, growth.

Editorial October 10, 2011

Central bankers are typically the most risk averse amongst policymakers. So when they take a gamble as big as a 1.5 per cent cut in the benchmark interest rate in the country, it is worth paying attention to the reasons as to why they did so. On Saturday October 8, the State Bank of Pakistan (SBP) issued a press release stating that it had decided to reduce the discount rate — the interest rate at which it lends money to commercial banks — to 12 per cent from 13.5 per cent, citing lower inflation.

There is no question that the move has a potential upside: the cut by the SBP is likely to have a cascading effect across the financial system, reducing borrowing costs throughout the economy, thus making it easier for businesses to grow. No sane Pakistani would be opposed to lower rates if they help accelerate economic growth and we hope this measure by the SBP has its desired effect. But given the allegations that the move was politically motivated, it is worth questioning the wisdom of reducing interest rates by 150 basis points in one go.

For starters, it had emerged that the analysis within the central bank was not unanimous in supporting quite so dramatic a rate cut. Indeed, there is considerable debate amongst the economists at the SBP as to whether a cut in interest rates would hurt or help the economy. While economic growth should be the primary concern of any government, it is not the job of the central bank to allow the administration to take short-cuts, particularly at the expense of potentially fuelling inflation. This is precisely why central banks are given more independence than any other part of the government’s economic management team.

Some experts believe that a reduction in rates may well cause inflation to rise from its already high levels and cause an acceleration in the depreciation of the rupee. This is highly dangerous at any time, but particularly dangerous when the government is expecting to make large payments on its external debts over the next few months. A better strategy might have been a more staggered approach in reduction of interest rates, balancing the concerns between inflation and growth. The SBP has decided to take a gamble by doing it all at once. Let us hope for the sake of the Pakistani economy that it works.

Published in The Express Tribune, October 11th, 2011.


Haider Hussain | 10 years ago | Reply @Mullah Ka Bengan: I agree with you somewhat. A line should be drawn between charging market-based interest and charging exorbitant rate that gives a feeling of taking advantage of borrower. We have Islamic Banking instruments (for example Sukuks) in Pakistan and they are only slightly different from the purely interest-based instruments like PIBs and Term Finance Certificates (TFCs). What you call "interest" in TFCs is called "rentals" in Sukuks. And the ironic thing is that the rental itself is somehow linked to KIBOR (Karachi Interbank Offer Rate). Interestingly, these instruments are certified by Muftis as well; so I wonder if our naive islamic friends have anything to say about it?!?!?!?!?!?!
Mullah Ka Bengan | 10 years ago | Reply


You are so naive. Its people like you who make Muslims sound idiotic and unintelligent. The next time you read about ‘interest’ in the Quran, please try to read it in the spirit in which it was written. If you are going to read ancient Arabic prose that contains the entire code of life, then research the language and understand the history and the culture of that area and of that time. Since your laziness will be an obstacle, as I imagine it usually is, refrain from making ignorant comments. If you go and read your history, you will find that a lot of people (and the Jews were notorious for this), would lend out to the needy at very unfair rates of “interest”. Now since there was no paper currency at that time, it was mostly done through trade and barter. Eventually men would end up owing their houses, wives, daughters, camels etc. The fact is that these people needed a loan because they were always strapped for cash and needed a livelihood. They would take the loan and try and start trade/business/means of earning bread. Most lenders would pick and choose their victims and charge an unreasonably high rate of interest, knowing that the borrower would “default” and so the lender would have claim on all the defaulter’s assets. Islam was simply trying to stop this practice. Basically, the message was not to charge interest to someone who is in need. Meaning – don’t take advantage of the weak. This is the overall message. A simple and beautiful code that appeals to the human intellect. You know the message to be true because it was already ingrained in you…you were already wired for it, so to speak. It’s the same feeling you get when you stand on top of a mountain and look around to admire the beauty. You were also wired for that feeling. What you feel that time is pure and the absolute truth. But then God also creates idiots like you to test the rest of us…to test our faith against your stupidity. You and your bearded cult over complicate matters as usual, starting your nonsense with the words, “Interest is HARAM” – pretending like you understand anything. Why is interest HARAM? A moron like you will say, “Because God said so”. Please use your miniscule brain and try and get into the depth of things.

When a commercial bank lends money to people and charges interest, do you think it’s taking advantage of people? No its not. It’s providing capital at the going interest. It’s making a spread by borrowing at a lower rate and charging at a higher rate. It’s fuelling the economy for growth – for people to start businesses and provide employment and income. Don’t bring your “Haram” talk in this. You understand nothing about banking or capital markets. You only understand what uninformed, ignorant and irresponsible bearded men teach you. Islamic Banking converts this “interest” into profit. It’s just a technicality and they have multiple products to do this. Otherwise, it’s exactly the same thing. Or are you trying to fool God?

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