Business community rejects hike in policy rate

KARACHI: The business community on Monday rejected a policy rate hike of 100 basis points by the State Bank of Pakistan (SBP), saying the decision would prove to be a double-edged sword for both the government as well as the private sector.

The central bank jacked up the policy rate to 17 percent from 16 percent in a latest monetary policy committee meeting on Monday, eyeing to contain inflation that has been soaring for last several months.

Trade and industry people termed the act of the central bank 'unwise' at a time when the economy is passing through a struggling phase and the industry has been grappling with a host of problems, especially non-opening of letters of credit to import raw materials as well as high tariffs of gas and electricity in the country. “The policy rate hike won't serve the purpose to contain inflation but will be burdening the government and devastating the private sector,” Shabir Mansha, vice president of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) told The News.

He said the government would be at disadvantage position as it was the biggest borrower. The interest rate hike would add massively in the cost of debt servicing of the government, he pointed out, adding, “The government borrows 80 to 85 percent of lending from commercial banks and the private sector's offtake is 15 to 20 percent.”

At a time when the government’s squeezed fiscal position is making it hard to pay the debt, a further rise in debt servicing would increase the budget deficit. Also, the private sector would equally suffer from the policy rate hike as it has been already bearing high cost of production, according to FPCCI vice president.

Mansha said the cost of borrowing for the private sector would be 20 to 21 percent when the spread of commercial banks was added in 17pc policy rate. “How the business would be able

to pay such high cost of borrowing when it is already suffering from multiple issues.”

Omar Islam, secretary general of Pakistan Vanaspati Manufacturers Association told The News that the business community was already facing LCs issues and high cost of inputs, and the policy rate hike would be rubbing more salt on its wounds, he added. “It [increase in policy rate] will make businesses uncompetitive and devastate the economy in terms of more cost of business,” Islam said.