KARACHI, June 9: By keeping the interest rate unchanged, the economy can be saved from hyper inflation, but it may suppress the already low growth rate in the country.
Experts said that the State Bank seems to have chosen an easy path by keeping the rates unchanged while blaming the government for the economic mess.
Like State Bank, some top bankers saw no option but to keep the interest rate as high as 12 per cent.
They believed that the monetary policy cannot be allowed to continue indefinitely.
“There is a need to reassess the interest rate stuck at 12 per cent for past eight months,” said a senior banker.
The banks, he said, are earning good money in this high interest rate policy, but options for lending to private sector are shrinking with poor economic growth.
The State Bank has criticised banks for their reluctance to lend to the private sector which hurts the economic growth. The SBP says that private sector participation in economy has reduced because of irresponsible attitude of the commercial banks.
“Banks have no option but to invest in government papers, particularly when businesses are failing creating massive defaults putting pressure on banks to strictly manage their risks,” said a senior banker.
Banks invest 80 per cent of their deposits in government papers.
Analysts said the fiscal deficit is a real challenge for both the government as well as the central bank.
The deficit forces the government to borrow huge money and compels the State Bank to manage inflation with less supply of money keeping the interest rate high.
The State Bank said it made the money policy less effective.
“The central bank is facing a challenging task of monetary management amid falling rupee and mounting government borrowing,” said Mohammad Sohail, Chief Executive of Topline Securities.
The government has borrowed Rs1.085 trillion during the 11 months of the current fiscal year while rupee has lost three per cent against the US dollar during last 20 days.
Both the trends may continue to move forward until fiscal reforms to turnaround the economy are not introduced, the State Bank has said.
Mr Sohail said that along with the rupee deprecation and fiscal borrowing, the State Bank is required to consider the overall economic growth where investment to GDP ratio has fallen to record low level raising unemployment.
The growth rate should be the focal point of the government as well as the State Bank but government’s massive borrowing from banking sector and the central bank’s fear of increasing inflation kept the growth out of focus.
The government struggles to meet the expenses by cutting the development budget while the State Bank keeps the money supply lower, blaming the government for inflation.
“Time and again the State Bank reiterated the alarming level of government borrowing as the underpinning reason for persistent inflation despite very low GDP growth, but the government failed to improve its revenue generation that forces it to borrow
more and makes the monetary policy ineffective,” said Khurram Schehzad, head of research at InvestCap Research.
He was of the view that even if Pakistan succeeds to deal with the IMF for another loan, the conditions attached with the loan would be harsher due to existing poor economic indicators.
The business community did not change their stance over the high interest rate. They said the higher interest rate has increased their cost of doing business while it also caused greater defaults.
Banks said the high defaults forced them to restrict lending to the private sector.