FPCCI asks SBP to leave interest rate on hold

KARACHI: Federation of Pakistan Chambers of Commerce & Industry (FPCCI) on Friday urged the State Bank of Pakistan (SBP) to avoid further increase in policy rate, fearing any rate hike would lead to stagflation and adverse effects on industrial growth in the country.

Use of the instrument of policy rate for controlling inflation has been counter-productive as Pakistan’s economy is less integrated with the financial sector, FPCCI president Nasir Hayyat Magoo stated in a statement.

He said this on recommendations and findings of a monetary policy brief released by the policy advisory board of FPCCI.

The advisory board that works under the chairmanship of FPCCI’s former federal secretary Mohammad Younus Dagha has published a policy brief titled ‘Assessment of Monetary Policy Effectiveness in Pakistan’ which formulates FPCCI’s input for upcoming monetary policy.

The paper gives as insight into causes of inflation and effectiveness of monetary policy based on analysis of economic

fundamentals, business cycle positioning, and a monetary policy survey for which

respondents were economists, financial market participants, and industry representatives.

The report finds that only 7 percent of the commercial entities borrow from the banking and financial system of the country. This renders monetary tightening for inflation control and management through increasing policy rate ineffectual and restricts its efficacy as a tool, it continued.

The report warns that Pakistan is heading towards stagflation with inflation mounted

to 11.5 percent whereas the core inflation was recorded at 7.6 percent in November 2021.

SBP increased the policy rates by 25 basis points and 150 basis points during the Monetary Policy Committee (MPC) meetings held in September and November 2021 respectively. This has created a speculative momentum that raised cut-off yields by 228 basis points for three-month T-bills to 10.78 percent.

It is imperative to note here that supply shocks such as a hike in commodity and oil prices provided impetus for current inflationary pressure.

In addition, massive depreciation of the Pakistani rupee against the US dollar along with measures under the IMF (International Monetary Fund) program has aggravated inflation further.

The policy advisory board of FPCCI recommends SBP to target core inflation rather than general inflation, saying that the inflationary pressure can be better controlled by shifting the exchange rate regime from flexible to a managed float.

They proposed that the government should use regulations and effective enforcement to counter speculations and manipulations by cartels that are playing havoc with the prices and exchange rates.