High interest rate: stumbling block in economic growth.

• Author: Kazmi, Shabbir

Byline: Shabbir Kazmi

At the recent monetary policy briefing, Dr. Reza Baqir, Governor, State Bank of Pakistan (SBP) defended persistent hike in policy rate as a measure to contain inflation in the country. One wonders how hike in policy rate can help the country's suffering from cost pushed inflation. According to analysts, the three factors responsible for high inflation in Pakistan are:

1) rising interest rate, 2) eroding value of rupee and 3) spiking electricity and gas tariffs. As food and other consumable items are becoming expensive, savings rate is on the decline. In search of safe havens not only small investors are investing in fixed income securities, but commercial banks are also investing bulk of the deposits in government securities.

The ongoing fall of stock market is being attributed to the hike in policy rate, resulting from shift in investment to low risk fixed income securities, from high risk equities. Added to this is the most insulting treatment faced by savers when they go to open an account with a commercial bank or a brokerage house under the new Know Your Customer (KYC) regime.

It is no secret that Pakistan's GDP rate is on the decline due to the poor performance of agriculture and manufacturing sectors, both of these are heavily dependent on borrowing from banks as well as informal lending system prevailing in the country. Farmers need money for buying seeds, fertilizers and pesticides. Similarly, two of largest agro-based industries (textiles and clothing and sugar) are highly leveraged.

Other sectors heavily dependent on bank borrowing are cement (on-going expansion), power generation, oil and gas distribution companies (circular debt). The hike in interest rate raises their cost of doing business. If they are able to pass on the hike, the ultimate sufferers are consumers and in case market conditions do not allow this, they have to take the hit.

According to analysts most of the local manufacturing units, particularly those making goods for overseas buyers, are operating at below optimum capacity utilization due to eroding competitiveness, resulting from high cost of doing business. It is on record that Pakistan cannot export surplus wheat, sugar and POL produced in the country, because it cannot compete in the global markets.

Height of disappointment is that the storage tanks of local refineries are overflowing because on restriction on use of furnace oil for power generation, but the commodity just cannot be...