KARACHI: Pakistan's central bank raised its key interest rate by 100 basis points to a record 21% on Tuesday, saying it would help meet inflation targets, while business leaders rejected the spike and said it would be “detrimental” to industries.
Pakistan's consumer price inflation hit a record annual level of just over 35% in March as food, beverage, and transportation prices have all surged more than 45%, putting pressure on household budgets and leaving many desperate, with at least 16 people killed in stampedes for food aid last week.
“The Monetary Policy Committee (MPC) views today’s decision as an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability,” the central bank said in its monetary policy statement.
“The Committee further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate.”
The central bank, defending its policy stance, said the new rate decision, along with previous accumulated monetary tightening, would help achieve the medium-term inflation target over the next eight quarters. However, the uncertainties attached with global financial conditions as well as Pakistan’s domestic political situation posed risks to this assessment, the State Bank said.
Reacting to the policy rate announcement, Pakistani industrialists said they refused to accept the decision.
“The entire business, industry and trade community of Pakistan has refused to accept a key policy rate of 21 percent,” Irfan Iqbal Sheikh, president of the Federation of Chambers of Commerce and Industry (FPCCI), said in a statement issued after the policy rate announcement.
“After today’s further raise of 100 basis points no commercial bank will now lend to private-sector for anything less than 23.5 to 24 percent.”
Sheikh said Pakistani exports were declining and had posted a negative growth for the seventh month in a row, showing a 14.76 percent year on year decline in March 2023.
“FPCCI is worried that the two major industries where the government should have had its focus vis-à-vis growth in export earnings are in systematic decline,” he said. “Textiles have declined by 11 percent, IT & Information Technology Enabled Services by 3 percent – and, the yearly decline in textiles alone can be up to $3 billion or upwards of 15 percent.”
The apex trade body said the current policy rate of 21% was well above Pakistan’s regional peers, including China, India, and Bangladesh, where the policy rates are 2.75%, 6.50%, and 6.00% respectively.
Despite progressive and major hikes in policy rates by 1125 basis points from 9.75% last February to 21% currently, inflation remained stubbornly-high and kept growing, the FPCCI president said, calling this a manifestation of an “utter failure” of monetary policy.
Kashif Anwar, president of the Lahore Chamber of Commerce and Industry (LCCI), said the rate hike would be “detrimental” to the country’s already reeling industries.
“The cost of doing business will further increase amid already high rupee devaluation and cost of borrowing,” he told Arab News. “The decision is detrimental to industries and it will lead to further higher inflation.”
The LCCI chief said many industries had already shut down operations due to unfavourable economic conditions, which would cause a drop in exports and mass unemployment.
Independent economists also agreed that the monetary policy instrument was not the effective tool to combat inflation which, according to them, came from supply side disruptions and government measures to increase the energy tariff.
“The monetary tightening is not the effective tool to control inflation in Pakistan where the inflation comes from the supply side shocks,” senior economist Dr Ashfaque Hassan Khan told Arab News. “The monetary tightening works fine in advanced countries where the inflation comes from the demand side.”
Khan said the interest rate hike had in fact increased inflation in the country: “When the central bank increases the policy rate by 1%, inflation jumps more than the rate hike by around 1.3%.”
Khan said the impact of higher inflation would be most severe for poor citizens who spent more than half of their income on food.
Dr Khaqan Najeeb, a former advisor to the finance ministry, said Pakistan’s economy was already showing signs of slowing down, evident from the manufacturing industry as well as cement and car sales.
“Major part of Pakistan inflation is off course coming from food that accounts for nearly 36% of the CPI (Consumer Price Index) and also abrupt increase in the energy prices both of gas and power, which were held for several months,” Najeeb said.
The interest rate hike has come as Pakistan is in talks with the International Monetary Fund to unlock its next tranche worth around $1.1 billion as part of a $6.5 billion bailout agreement reached in 2019.
In it's statement on Tuesday, the central bank also reemphasised that the early conclusion of the ninth review of the IMF program was critical to rebuilding forex reserve buffers.
