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Mere low discount rate not sufficient enough to underpin economic recovery

Mere low discount rate not sufficient enough to underpin economic recovery

A simple economics concept stipulates that lowering interest rates triggers the spending by the consumers, usually in the shape of the purchase of consumer goods, and it could help the businesses grow since the private sector finds it cheaper to invest and subsequently to pay back to the banks. In the instance of Pakistan economy, the purchasing by the consumers has compounded manifold over the years leading to consumerism as well as the inflationary pressures whereas the private sector seems to be shying away largely. This has substantiated the claim that Pakistan’s economy is moving towards being a trading economy rather than focusing on its strengths for the long term sustainability. In the panorama of the economy of Pakistan, historically the lower interest rates in particular have not helped the economy ameliorate.

One more generally held economics concept, applied by the central bank, is that increasing policy rates help curb the inflationary pressures leading to probably amplification in the value of the local currency or to curtail the rapidly eroding value of the local currency, to be precise. It does not hold true in the circumstances prevailing in Pakistan.

Increasing or lowering discount rate by the central bank has not altered the economic circumstances in Pakistan as presumed. This manifests that there is something which insinuates leading the decisions of lowering or increasing discount rates nowhere. Here arises one question: do the banks play a role in terms of aggravation or amelioration of the economy? This question is to be answered in the context of the economic growth of Pakistan particularly over the period from 2002 to present. Some analysts presume nothing was achieved in terms of sound economic growth for the sustainability of the economy of Pakistan.

Lending rates of the commercial banks in Pakistan were up to 25 per cent a year in the decade of 1990s, however, the same went down to single digit, as claimed by the bankers, in the decade of 2000. The National Assembly of Pakistan was apprised last year that commercial banks were charging individuals up to 29 percent interest rate despite the historically lowest 5.75 percent policy rate of the State Bank of Pakistan. As per the statement, the Silk Bank was charging interest rate of 28.89%, 21.91% by the Standard Chartered Bank, 7.77% by the Habib Metropolitan Bank Limited, 18.44% by the First Women Bank and 13.84% by the Zarai Taraqiati Bank Limited.

Generally, a loose monetary policy ensures expansion of the money supply so that there is economic growth. It has not happened in the economy of Pakistan.



The State Bank of Pakistan brought down the discount rate to 5.75 percent last year which reminds us of the increase in the discount rate by 200 basis points to 15 percent in November 2008. Those who argued that increase of 200 bps in the discount rate by SBP in November 2008 was anti-growth might not have answer when the discount rate went down to 5.75 percent last year without leaving the traces of sound economic growth. All this manifests that there is something missing and that missing is to be tackled to fix the long-standing conundrums of the economy of Pakistan. The low discount rate period has not actually underpinned the economic growth in Pakistan. International oil prices were historic low in 2015 and the discount rates were in the single digit, however, there was no sign of robust economic recovery in Pakistan. The discount rates were at 9.5 percent in January 2015, however, were slashed to 8.5 percent in the last week of the same month. The central bank slashed interest rates to 7 percent in May 2015.

The incumbent finance minister needs to know that the economic model of Pakistan is not based on consumerism like that of the US. Pakistan needs to promote the culture of saving to enhance the financial stability at present. Lowering discount rate may not prove supportive to the economy in the current economic situation of Pakistan. However single digit discount rate near the double digit might be helpful to both business activities and the financial sector.

Pakistan might approach International Monetary Fund sooner rather than later to underpin the economy. The current government is not left with many options. According to some source, the utmost endeavor of the government is to avert IMF option which might be detrimental for the already devastated economy. The last IMF package of $6.6 billion in 2013 is deemed a mistake as well as prudent decision simultaneously by various quarters. If Pakistan approaches IMF in the near future, the interest rate may experience a hike leading to erosion of the value of the local currency and the mounting inflationary pressures.

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