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Contractionary Monetary Policy Is Anti-Investment and Anti-Trade

Islamabad: Sheikh Shakeel Ahmed Dhingra, Acting President of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has lamented State Bank of Pakistan (SBP) for maintaining mark up rate at 12 percent in the recently announced monetary policy and said that it is against the expectation of trade and industry, who have been clamouring for the reduction in mark up rate to a single digit due to a variety of reasons.

The FPCCI Acting Chief elaborated that the SBP continues to operate a tight monetary policy despite the clear evidence that such policy strangulates investment and trade activities in Pakistan and has hampered the growth of manufacturing sector in Pakistan, the growth of which has already faced a serious crisis due to continuous rising of electricity tariff and protracted load shedding.

Mr. Dhingra said that in the current scenario, when private sector investment is needed in the country, SBP is using a tight monetary policy to compensate for the government’s borrowing for financing its current expenditures. Moreover, our non performing loans are also increasing continuously and now it stands at 16.2 percent of total loans in December 2011 as compared to 10.5 percent in 2008, which should be minimized for attaining sustainable growth.

He added that the growth of core industries are continuously showing declining trend due to scarcity of credit to private sector, which has reduced to Rs.243.3 billion in FY2012 (July- March) as compared to Rs. 369.85 billion in the same period of FY08. Consequently, Pakistani banks will face the specter of rising Non-Performing Loans (NPLs) in the near future, as higher lending rates and a weak economy continue to deal a double blow to borrowers’ payment capacity.

He further said that an interest rate of 12% is one of the highest in the world, compared to India at 8.50%, China at 6.56%, Thailand at 3.0% and South Korea at 3.25%. Moreover, the banking spread in Pakistan is between the 7 to 8%, which is also highest in the world, which needs to be narrowed by reducing the lending rate and increasing deposit rate to remove the saving- investment gap of Pakistan, he proposed.

Furthermore, Mr. Dhingra, not agreeing to SBP stance that the higher interest rate in Pakistan is maintained because of the higher inflation in Pakistan said that the nature of inflation is not demand pull and therefore, cannot be controlled through a tight monetary policy.

It is a supply side phenomenon, whereby the major cause of rising prices is an increase in the prices of industrial inputs and shortage of essential items of daily use. All of these commodities are price inelastic products and monetary policy cannot control increase in their prices, he argued.

He proposed SBP to focus on increasing the demand for credit by reducing the discount rate to a single digit figure. Moreover, he pointed out that the monetary policy contradicts our fiscal and trade policies, which are based on the expansion of private sector credit facilities under different incentives and schemes. He further recommended that the government must curb its current expenditure considerably in order to limit the scale of borrowing from SBP.

For more information, contact:
Syed Masood Alam Rizvi
Secretary General
Federation of Pakistan Chambers of Commerce and Industry (FPCCI)
B-1, Federation House, Main Clifton Road, Shahra-e-Firdousi,
Karachi-75600, Pakistan
Tel: +9221 3587 3691
Fax: +9221 3587 4332
Email: info@fpcci.com.pk

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