Lowering the interest rate

While cut in interest rates has helped the public obtain finance at a cheaper cost, it has not spurred economic growth

The State Bank of Pakistan (SBP) last week announced another 50 basis points cut in the policy rate, taking it down to six per cent on the back of average inflation figures that have remained on the lower side. While noting that there was an upside risk to the central bank’s estimate of average inflation, the SBP added that the probability of a downside risk was greater, hence a rate cut made sense. The central bank has also recently introduced an interest-rate corridor that is aimed at keeping the money market weighted average overnight rate close to the target/policy rate. These are positive developments for the country’s business sector and those seeking personal loans. However, one cannot help but wonder if the credit off-take has increased, which is the salient benefit of a cut in the benchmark interest rate. Data shows that demand is yet to pick up, with analysts stressing that development spending during the ongoing fiscal year, along with the China-Pakistan Economic Corridor would spur the credit off-take.

A closer analysis tells us that the government remains the single largest borrower, with banks heavily investing in government securities over the last three years. According to SBP data, credit to the government sector — through investing in securities and loans — has risen at a speed greater than the loans advanced to the private sector. When such ‘crowding out’ takes place, private sector businesses find it harder to obtain loans. While the cut in interest rates has helped the public obtain car and housing finance at a cheaper cost, the fact is that it has not as yet spurred economic growth. How many companies have announced expansion plans or decided to boost operations with crude oil prices going down by over 50 per cent? In the coming months, average inflation is likely to rise as the base-year effect will now come into play. The SBP would be inclined to either keep interest rates steady or increase them. Credit off-take will not increase the way it was hoped it would, and will slow down any prospects of economic growth. The biggest beneficiary would be the heaviest borrower. We all know who that is.

Published in The Express Tribune, September 16^th,  2015.

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