STATE Bank of Pakistan on Monday raised its key interest rate by 100 basis points to a twenty five year high of seventeen percent in an attempt to tame persistently high inflation, stressing that achieving price stability was crucial for attaining sustainable economic growth in the future.
Most of the economists and market watchers were also anticipating the same but the private and industrial sector is really worried over the situation.
The economy is already facing many challenges including sharp currency devaluation, unbearable foreign debt, depleting foreign exchange reserves, growing fiscal imbalances and dwindling foreign direct investments.
In such kind of situation, the monetary policy should be such which supports industrialization.
Unfortunately, our successive governments have used the policy of increasing interest rates to control inflation which has failed miserably.
This massive hike in the policy interest rate would adversely affect all sectors of the economy and lead to further downfall in the trade and industrial activities.
Instead of curbing inflation, this policy of increasing the interest rates has resulted in rapid de-industrialization in the country, resulting in the negative GDP growth rate.
This move would only rub more salt into the wounds of the export industry that has been losing its profit margins and competitiveness in overseas markets to high cost of raw material, energy and other inputs.
This essentially means that access to finance, which is imperative for the growth of industry, is already more expensive in Pakistan as compared to other economies in the region.
Then since the government itself is the biggest borrower, any increase in interest rate also increases its borrowing cost, resulting in worsening of fiscal deficit.
Hence it is really imperative to bring the mark up rate at par with the regional countries which is much lower.
Bringing it down will encourage new investment which will give a jumpstart to the economy.
We have to move forward quickly to make the country a hub of manufacturing activities and a heaven for investors, if we really want to address our economic woes.