THE State Bank of Pakistan, while announcing its monetary policy for the next one and a half months, has reduced the interest rate by 2.5%, lowering it from 17.5% to 15%. This marks the fourth consecutive reduction in interest rates since June, with the State Bank cutting rates by 7% in the last five months until November 4. Experts believe that the reduction in interest rates will lead to improvements in business activities.
A lower interest rate indicates a decrease in inflation, which will help control rising prices and alleviate the issues faced by the common man. There is no doubt that given the rising inflation, a strict monetary policy was necessary to bring it down. Now that the country’s economic conditions are improving and inflation is gradually decreasing, reducing the interest rate seems to be a good strategy. This will strengthen economic stability and help achieve sustainable economic growth.
The current government, with its economic vision outlined in its manifesto, was expected by the business community to reduce the interest rate by at least 5% to boost economic activities. Economic experts suggest that a significant reduction in the interest rate around 10-12% could encourage industries that moved abroad to return to Pakistan. While this may be possible, some industrialists have adopted a strategy of taking loans from local banks, moving abroad and continuing operations and trade there. They have presented themselves as being in financial distress in Pakistan, thereby causing considerable losses to their factories and mills, which helped them secure loan waivers and significant reductions.
There is no doubt that a reduction in interest rates will lower business and production costs, which will positively impact the industrial sector. Lower production costs will make Pakistani products more competitive in the international market, giving them an advantage over products from other countries in the region. Due to the high production costs in Pakistan, it is difficult to compete with goods from other Asian nations in the global market. Lower business costs will also lead to an increase in investment, which has been on the decline. The reduction in the discount rate will have an impact on foreign investment as well. The continuous decline in foreign investment in Pakistan may improve, attracting foreign investors to the country.
The high costs of electricity, gas, and petroleum products in Pakistan have also significantly impacted industrial and commercial sectors. The recent reduction in the discount rate will bring some relief to these sectors. For the government, supporting the ailing economy is the biggest challenge. With declining exports, mounting foreign debt and the destruction of industries, the country faces several problems. The lack of focus on exports has led to an increasing trade and fiscal deficit.
To pull the country out of the economic crisis, it is essential to increase exports and reduce the import bill or freeze the import level for the next five years, ensuring that imports do not exceed this threshold. Over the past two to three years, while exports have been falling, imports have been rising. The government should create a five-year strategic framework to promote foreign trade.
—The writer is contributing columnist, based in Faisalabad.
