Commentary. The article proposed a dilemma that State Bank of Pakistan (SBP) is facing at current. Form the last couple of years SBP has been tightening its monetary policy in order to control inflation which posed a serious problem to the health of the e

by sarfrazkhalil (student)

University Degree Business and Administrative studies

The Problem

The article proposed a dilemma that State Bank of Pakistan (SBP) is facing at current. Form the last couple of years SBP has been tightening its monetary policy in order to control inflation which posed a serious problem to the health of the economy. Since July 2011, SBP has stated loosening its measure of monetary policy i.e. interest rate. SBP slashed 50pbs in July 2011 and 150 bps in October 2011, after which the interest rate stood at 12% which is yet quite higher. Due to the previous interest rate cuts the businessmen of the country are expecting more declines in the interest rate so that their cost of borrowing could be decreased and they may think regarding the financing of expansion initiatives. This interest rate cut is said to be the only choice that the policy makers at present could opt to rescue the nation from the downturn of the economy, the country is facing for last few years. This rapid decline in the interest rate on the other hand, is indicating that SBP is considering, cutting the interest rate to a single digit in an expectation of a moderately bright future outlook of the economy. The higher interest rate has been deteriorating the economic health of the country by affecting the investment activity and employment conditions. The decrease in the interest rate would restore the health of the economy by supporting sustainable growth, promoting investment spending and creating job opportunities. But the condition has been changed as the future bright outlook of the economy has proved to be futile and it is said to be a difficult thing for the SBP to cut the interest rate any further mainly due to adverse economic conditions. Cut in the interest rate on the other hand is also a need of the era and business community around the country is demanding it. The higher interest rate on the other hand has deteriorated the balance of payments and current account and this thing has built pressure on the foreign exchange reserves. Moreover, inflation also surged slightly despite the higher interest rate which has an indirect relationship with inflation. Furthermore, large scale manufacturing sector growth has come to halt and non-performing loans of bank are increasing. Both foreign and local investments are showing decreasing trends as investors are showing the tendency to repay their loans rather than investing their profits again in the business. The debt is costly so that a single digit interest rate is desirable to boost the investment activity in the industrial sector.

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Businesses are closing down, people becoming jobless and little is available to export. This situation on the other hand could build pressure on the foreign exchange reserves and foreign exchange rates. The cost of debt servicing is the major cost for the businesses and due to high debt servicing the factories are being closed mainly in knitwear and women garments sector. Not only high cost of debt is the responsible of the situation, other factors such like energy crises and terrorism has also contributed to worsen the situation but the main problem no doubt is the high cost of debt. Apart from private sector, government sector is also facing problems due to this high cost of capital. Government is paying almost four times more interest charge on the domestic loan than it is paying on external loans. In the current economic downturn of sluggish economic growth Pakistani policy makers are doing opposite to the developed economies that have cut their inflation rates to the lowest levels and are injecting funds in their economies to pull their economies out of the current recession. The interest rate in the Pakistan is also greater than the other economies in this region of the world i.e. India, China and Bangladesh. Moreover, India that is under the same economic conditions as Pakistan has adopted the policy of lowering its interest rate despite a strong decrease in the value of currency.

So the main problems Pakistan is facing now a days is the sluggish economy which is damaging the industrial and economic growth that in turn causing unemployment and inflation which require tightening of monetary policy which involves increase in interest rate which increase the cost of debt and hinders the industrial expansion and economic growth. SBP is facing the dilemma that whether it should reverse the recent decline in the interest rate to curb inflation or whether it should further decline the interest rate to support investment spending.

Solution

The author has recommended a further decline in the interest rate with a view to support the investment spending that would than create the employment opportunities in the economy and uplift the economy. The author has provided the past experience of five years to justify the solution. The previous five year experience of increasing the interest rate is proved futile as higher interest rate for this much time has hindered the economic growth of the country. The industry is getting closed; unemployment at the peak and the inflation still could not be brought to a single digit. Moreover, the author provided that inflation in Pakistan is mainly due to food items and fuel, which are not related to interest rate by any mean. The author also provides examples of the developed countries and their monetary policy in the current era of economic instability. Moreover, the examples of the economies of the home region i.e. China, India and Bangladesh are quoted here to support his argument.

The author however, did not cite any formal or informal studies. The argument is supported by mean of examples of different countries and by opinion of different analysts relating to the field. The opinion and arguments of Gohar Ejaz, former chairman of the All Pakistan Textile Mills Association are highlighted in this article so far. The facts provided in this article are theoretical one and are widely studied issues in economics thus, the formal citation was not that necessary. The statistics provided in the study are also not referred as to from where the author found this information. Was that source reliable is the major question that comes into one’s mind. The need for valid citation has gained very much importance after the advent and advancement of digital race as most of the material found on internet is not that reliable.

The author supported his arguments by mean of facts and examples relating to other countries and of Pakistan as well. He provided the example of the past monetary policy of the Pakistan providing that this was futile. Moreover, the statistics relating to economic, financial and trade outlook such like interest rate, balance of payments, current account, growth of manufacturing sector, non-performing loans, investment, government debt and debt servicing are used by the author with a view to clarify the arguments in an objective manner. The argument on the whole is well supported by examples and had a sound theoretical base along with statistical data support where necessary. The author successfully addressed a serious economic issue and recommended the solution as well that satisfies all dimensions of argument by theoretical means which is properly supported by brief reference of examples and by statistical data.

The author expressed his opinion by favoring decline in the interest rate. He did not provide any alterative way to tackle the problem. He said that the only way to support the economic activity and create the jobs in the country is to decrease interest rate to promote investing activities. He did evaluate the only option he provided in an objective manner. The other options thus are out of scope as for as this article is concerned. The evaluation of the solution was done as the last possible option and the evaluation seems to be theoretically sound. Further strength to the evaluation has been provided by means of providing the examples and statistical data in the article.

Reference of the article

Policy rate choice and growth tilt by Nasir Jamal, Published in Economic and Business Magazine , DAWN on November 28, 2011, Retrieved from: