Daily Times

The State Bank of Pakistan’s decision to cut the benchmark interest rate by 200 basis points (bps) on September 12 has not gone well with business people across Pakistan. With well-guarded expressions, they called the cut a step in the right direction, but in the same breath they called it too little to be effective to solve the financial challenges traders and industrialists are facing.

Business leaders said that businesses, especially exporters, importers, and small companies, are facing a severe liquidity crunch. The sharp increase in business costs, along with record-high energy prices, has made it difficult for businesses to operate smoothly.

The September 12 cut in the interest rate to 17.5 percent is a third rate cut in two months, deviating from tight monetary policies in place for the last four years. Business leaders demand a single-digit interest rate to change the economic landscape which would encourage borrowing, reduce costs and make it easier to expand their businesses.

There is need for the interest rate to be lowered further, besides the initiation of a long-term monetary policy to ensure stability and predictability for businesses in the future. One does not need to be an economy expert to point out that the current interest rate does not reflect the economic reality. Core inflation in September is expected to be around 8 percent, while global oil prices have fallen to a three-year low, dropping below $70 per barrel. These factors suggest there is no reason to keep interest rates so high. They argued that the interest rate should be brought down to 12 percent immediately, which would help exporters compete more effectively in regional and international markets.

While business people’s demands are just and fair, culprits lie in detail. Our fragile economy has been hit hard by several factors over the decades, among them the most notable are global recession, power crisis and poor debt management. The government’s decision to tie interest rates to the consumer price index caused many investors to pull their money out of the country or move it abroad, leaving the economy on the brink of collapse multiple times.

What can the government do to satisfy the businesses?

The solution lies in consistent economic reform agenda aimed at curbing inflation and restoring investor confidence. Recent we saw a decline in inflation, thanks to State Bank’s policies as well as improved agricultural output and more effective administrative measures. *