Increase in discount rate slammed

KARACHI: Industrialists and economic experts alike have heavily criticised the decision taken by the State Bank of Pakistan to increase the discount rate by 50 basis points to 13 per cent.

The central bank has cited excessive government borrowing and persistent inflation as leading causes for economic imbalances. SBP Acting Governor Yaseen Anwar said the increase will counter inflationary pressures from higher power tariffs, rising international commodity prices and fiscal slippages.

However, industrialists have taken exception to this explanation and have criticised the tightening stance adopted by the State Bank.

Economists contacted by The Express Tribune commented that government borrowing would not be deterred by higher interest rates. At the same time, they said higher cost of obtaining funds would increase the overall cost of production for companies, thus adding to inflationary pressures.

“This increase will only serve to derail the already fragile economic recovery,” commented InvestCap’s Head of Research Khurrum Schezad. “This route has been tried before and it did not work. The costs we will bear are much higher than any perceived benefits,” he added.

Representatives of industries have also expressed concern over SBP’s actions taken to reduce government borrowing or lower inflation.

“This decision shows that neither the government nor the central bank is interested in understanding the dynamics faced by industries in the country,” commented President All Pakistan Hosiery Manufacturers Association Shabbir Ahmed. “Our exports are already suffering and this will render many companies uncompetitive because of the increase in interest rates that will follow this announcement.”

“The central bank seems to be at a loss to understand how to tackle inflation,” commented President of the Small and Medium Enterprises Association Zulfiqar Thaver. He added that banks are already unwilling to lend to small and medium enterprises given the lack of liquidity in the market and that the increase would further limit access to financing at affordable rates for smaller firms.

“This decision will be the last nail in the coffin for many Pakistani businesses, especially export-oriented companies and those relying on foreign investments,” warned former chairman Karachi Chamber of Commerce and Industry Anjum Nisar.

“When they realise that supply side shocks are causing inflation, then why do they not address concerns on that side?” he questioned.

Representatives of other trade bodies and industries have also decried the decision. Many have demanded that industrialists should be taken on board in arriving at decisions. They also criticised the government for fiscal irresponsibility that has mandated the decision from the central bank.

Published in The Express Tribune, July 31^st, 2010.