Raise to be counterproductive
Written by Writer on Thursday, November 13th, 2008
Raise to be counterproductive
By Afzal Bajwa
ISLAMABAD - Independent economists have opined that State Bank of Pakistan has increased the interest rates by another two per cent chiefly due to the International Monetary Fund conditionality and it could be a counterproductive move.
Even those who were in favour of the interest rate increase were also not forthcoming to speak on the record on the subject because it was highly controversial. A chief economist of a private bank agreed that it was to curtail both inflation and yawning trade deficit, still he termed it as untimely.
“It would have served the purpose if it was done at the beginning of the current financial year when the SBP increased it only by one per cent, it could have been effective to serve the purpose,” he maintained.
Another economic analyst Masood Daher who of all dared to be quoted on the subject also shared the opinion that the interest rate increase was not very well thought out measure. Rather it was unjustifiable merely following precondition of the IMF, he added.
“The SBP has increased the interest without measuring its negative impact on the overall economic growth,” he said, adding the increase would further enhance the cost of production resulting in an industrial slow-down. “The government is almost sleeping or it was not willing to address the issues timely and in a proper way. Prices of all the necessary items including oil, wheat, edible, and steel are coming down world over while no one is here to adjust them downward,” he maintained.
Daher believed that it was universally agreed principle that the interest rate increase couldn’t impact the inflation in terms of curtailing it before a couple of years from its increase. He gave the example of Argentina where inflation grew up to 500 per cent in 1988. “They curtailed it through downing their interest rates to increase production that worked within even a year’s time,” he added.
Another economist who didn’t want to be named told TheNation that even Governor SBP Shamshad Akhtar was also not in favour of the latest increase in the interest rates but the government required her to do so for the IMF conditionality. He was of the view that it could serve the purpose of curtailing inflation if the increase was for a temporary period of time and reserved accordingly.
Head of a private financial institution at the same time observed that such ill thought out measures were expression of the regulatory failure in Pakistan. He pointed out lack of coordination between the Securities and Exchange Commission of Pakistan, the apex corporate regulator, and the SBP, which was banking sector regulator as well, had resulted into the collapse of Mutual Fund in Pakistan.
He also pointed out that the heads of treasuries of the big commercial banks were on the government’s advisory committees who allegedly were misusing their positions in the government. It was not much difficult for the SBP to check which of the big commercial banks generated profits from the currency business during the last few months.
Therefore, he termed the central bank’s approach to increase the interest for curtailing inflation and current account deficit as a ‘textbook’ approach. This sort of approach could only work in the countries where these textbooks were written in other words, which are the documented economies. The American or British textbooks’ approach could not work in the economies like Pakistan and Afghanistan wherein more than half of the economic activity was not documented at all.
He also feared that the interest rates increase would force the consumer financing, micro-financing, and small and medium size enterprise (SME) finance to be closed down eventually to increase unemployment. He claimed that it would rather lead the country’s economy toward ‘hyperinflation’.
Nawaiwaqt Group of News Papers
