PIAF welcomes over 4pc cut in policy rate by SBP in one month

By: News Desk      Published: 09:30 PM, 18 Apr, 2020
PIAF welcomes over 4pc cut in policy rate by SBP in one month
PIAF Chairman Mian Nauman Kabir.–File photo

The Pakistan Industrial and Traders Associations Front (PIAF) has appreciated the State Bank of Pakistan’s decision to lower the discount rate by 200 basis points, bringing it to 9 percent, which will spur the economic activity slowed down by the coronavirus outbreak.

PIAF Chairman Mian Nauman Kabir said in a joint statement with Senior Vice Chairman Nasir Hameed and Vice Chairman Javed Iqbal that a cumulative reduction of more than 4 percent in interest rate in just one month would cut cost of production, strengthen debt repayment ability and improve the credit worthiness.

“PIAF welcomes SBP’s decision of third cut since March 17, 2020 when the rate was 13.25 percent, which will definitely stimulate economic activity, as the interest rate has declined by 4.25 percent during one month,” he said.

Mian Nauman Kabir observed that such initiatives also result in job creation. Such financing helps businessmen enhance their working capital and better manage their inventory, he added. He believes the decrease in borrowing costs coupled with the decline in energy price may raise the exports in days to come.

He said that interest rate cut would complement other measures introduced by the central bank to support Pakistan’s economy during this crisis. In the past month, it has offered concessional financing to companies that do not lay off workers; one-year extension in principal payments; doubling of the period for rescheduling of loans from 90 to 180 days; concessional financing for hospitals and medical centres facing rising costs in fighting COVID-19 pandemic.

Nauman Kabir said that the cost of doing business and cost of production have shot up to the level of uncompetitiveness. The cost of borrowing was huge and capital financing had become more expensive. He said that a significant cut of over 4 percent in the discount rate would inject fresh blood into the industrial sector, which was facing a number of internal and external challenges.

PIAF Senior Vice Chairman Nasir Hameed said the State Bank of Pakistan’s approach towards monetary policy had been rather conservative in the past and was based on its own analysis of the situation. The government has now come up with concrete policies to reduce rampant corruption in state-owned organisations and eradicate poverty and unemployment. He said the government should also bring down electricity rates and logistics in the falling oil prices scenario.

He said that this move would cushion the impact of the coronavirus shock on growth and employment by easing borrowing costs and the debt service burden of households and firms, maintaining financial stability. It would also help ensure that economic activity is better placed to recover when the pandemic subsides.

PIAF Vice Chairman Javed Iqbal said that lower interest rate triggers borrowing and investments. He added that excessive use of bank borrowing by the government led to excessive rate of inflation, reduced the supply of credit to the private sector and increased the nominal lending rates, reflecting high inflation, attractive return offered by the government and high interest rate spread.

According to reports, the global economy was expected to contract by as much as 3 percent in 2020, which will be much worse than the 0.07 percent contraction during the global financial crisis of 2009. The Pakistan economy is also expected to contract by -1.5 percent in FY20 before recovering to around 2 percent growth in FY21.

Javed Iqbal said that now SBP’s large cut in interest rate will revitalise the country’s economic growth. He said that Pakistan has no employment generation, as industries are being closed down and non-performing loans are rising, posing a threat to industrial growth.