Mr. Sultan Ahmad Chawla, the President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has expressed his serious concern over monetary policy statement of the Governor State Bank of Pakistan . He indicated that economists are agreed on the implementation of the expansionary monetary policy in the state of recession to control over the damaging affects of recession on employment and investment. The logic behind the continuity in the contractionary monetary policy adopted by the Pakistani monetary authorities is not understandable. Economists have been recommending expansionary policies during the cessionary phase.
It is noted that SBP has been justifying the tight monetary policy to control over inflation since last two years but inflation has been rising continuously. It shows that SBP is preparing monetary policy without studying the nature of inflation. In Pakistan , the nature of inflation is not demand pull, which can be controlled through tight monetary policy. It is a supply side phenomenon. The major cause of rising inflation in the country was increase in the prices of industrial inputs and shortage of essential items of daily necessity.
All these are inelastic products and monetary policy can not control their prices. We have to take such measures which improve the supply side of these goods and have to improve our inventory management. In the name of reducing inflation, State Bank policy measures have been generating more inflation. As a consequence of these steps inflation in the country will not decrease but it will increase further. The discount rate was 9.5 percent at the end of July 2007 and rate of inflation was 7.8 percent. It was raised by 50 basis points on 31 July 2007 (10 percent), on 1st February, 2008 SBP further raised 50 basis points to 10.5 percent while the inflation had also increased by 1 percent and reached to 8.8 percent and lastly on 12th November, 2008 SBP raised discount rate by 200 basis points and rate of inflation was 24.65 percent. Now core inflation has reached at 18 percent from 30 percent in the mid of 2008 because of world recession and decline in oil prices. However SBP has refused to decline interest rate.
The increase in the basic interest rate was the most damaging tool adopted by the monetary authorities to tighten the monetary policy in past. As a result of contractionary monetary policy, the cost of financing in Pakistan rapidly increased which affected the competitiveness of industry. According to the Economic Intelligence Unit London, Pakistan has the highest cost of borrowing in the world. The rate of interest for long term financing is 18% in Pakistan, 8.4% in India, 7.5% in Indonesia, 3.5% in Malaysia, 1.5 % in Japan, 4.4% in U.K. while rate of interest for short tem financing is 15% in Pakistan, 8.7% in India, 10.8% in Indonesia, 3.7% in Malaysia, 0.7% in Japan and 5.9% in U.K.
He stated that high spread is the other crucial indicator in the banking system, which is hampering the industry. He referred to banking spreads in other countries such as USA is 1.3 percent, 1.7 percent in Japan , 3.1 percent in India , 4.4 percent in Sir Lanka and 5.5 percent in Nepal . Banking spreads are directly related with the mark up income of the banks. During the last couple of years, banking sector in Pakistan earned significant markup income on the basis of high spreads.He stated that moratorium on long term financing facilities announced by the SBP in recent past and the enhancement in the magnitude of targeted financing for LTFF and EFS will not be fruitful unless discount rate is reduced.
The increase in the basic interest rate was the most damaging tool adopted by the monetary authorities to tighten the monetary policy in past. As a result of contractionary monetary policy, the cost of financing in Pakistan rapidly increased which affected the competitiveness of industry. According to the Economic Intelligence Unit London, Pakistan has the highest cost of borrowing in the world. The rate of interest for long term financing is 18% in Pakistan, 8.4% in India, 7.5% in Indonesia, 3.5% in Malaysia, 1.5 % in Japan, 4.4% in U.K. while rate of interest for short tem financing is 15% in Pakistan, 8.7% in India, 10.8% in Indonesia, 3.7% in Malaysia, 0.7% in Japan and 5.9% in U.K. He stated that high spread is the other crucial indicator in the banking system, which is hampering the industry. He referred to banking spreads in other countries such as USA is 1.3 percent, 1.7 percent in Japan , 3.1 percent in India , 4.4 percent in Sir Lanka and 5.5 percent in Nepal .
Banking spreads are directly related with the mark up income of the banks. During the last couple of years, banking sector in Pakistan earned significant markup income on the basis of high spreads. He stated that moratorium on long term financing facilities announced by the SBP in recent past and the enhancement in the magnitude of targeted financing for LTFF and EFS will not be fruitful unless discount rate is reduced.
Mr. Sultan A. Chawla indicated that hike in electricity and gas prices along with increase in interest rates and the sever shortage of energy have seriously damaged the industrial competitiveness. He is with the firm opinion that Mr. Saleem Raza the newly appointed Governor SBP will understand the wisdom behind the FPCCI recommendation and will take corrective measures.