Business Community Urges SBP to Lower Interest Rates for Economic Growth

The business community has collectively appealed to the government and the State Bank of Pakistan (SBP) to decrease interest rates, aiming to stimulate industrial activity, trade, and overall economic improvement across the nation.

Business leaders argue that the current policy rate of 11 percent is not justified, especially considering that inflation has dropped to 3.2 percent and the GDP growth is trailing behind other economies in the region.

United Business Group’s Appeal

Zubair Tufail, the President of the United Business Group (UB), has specifically asked the State Bank of Pakistan to reduce the policy interest rate to single digits during the forthcoming monetary policy announcement scheduled for July 30.

Tufail cautioned that the consistently high interest rates are significantly impacting Pakistan’s industrial and business sectors, potentially pushing them to a breaking point. He noted that industries have been facing substantial financial challenges for months due to the elevated cost of borrowing. According to Tufail, failing to immediately reduce the interest rate to a single digit could lead to the closure of numerous industries in the coming weeks, which would have severe repercussions for both the economy and low-income communities.

Tufail stressed that industries form the backbone of any economy, and their failure would set off a chain reaction that would increase unemployment, decrease exports, reduce tax revenues, and ultimately hinder national economic growth.

He also highlighted the difference between Pakistan’s interest rates and those of other economies in the area. He pointed out that Pakistan’s interest rate is considerably higher compared to neighboring countries. He mentioned that Vietnam’s rate is 6.3%, Cambodia’s is 3%, Indonesia’s is 6%, and India’s is 5.5%. As a result, Pakistan’s industries are struggling with expensive borrowing costs, which is impeding growth and investment.

Tufail urged both the State Bank and the government to understand the urgency of the situation and take swift action to protect Pakistan’s economy, calling for decisive and timely decisions. He further stated that lowering the interest rate is a strategic necessity for the survival of industry and the livelihoods of millions, and not just an economic one.

Call for Immediate Reduction to 6%

Sheikh Umer Rehan, Chairman of the Pakistan Vanaspati Manufacturers Association (PVMA), echoed similar sentiments, advocating for an immediate reduction in the policy interest rate to 6% given the improved economic indicators.

Rehan emphasized that the existing high interest rate is detrimental to industrial growth, economic activity, and job creation. He pointed out that Pakistan’s current policy rate of 11% is among the highest in the region, leading to a notable increase in business costs and difficulties for industries to operate smoothly. He added that with inflation decreasing to 3.2%, foreign exchange reserves exceeding $12 billion, and the exchange rate showing stability, there is a solid reason to lower the interest rate.

Rehan mentioned that neighboring countries like India, Bangladesh, and Sri Lanka have maintained interest rates between 6% and 8% to support industrial activity. In contrast, Pakistan’s high rate restricts industrial recovery and impacts production planning across crucial sectors.

He also noted that the edible oil industry, which depends on imported raw materials, is facing significant financial pressure. The elevated borrowing costs are making it difficult for industries to manage working capital and sustain output levels. Rehan cautioned that it will become increasingly challenging to operate even essential sectors if financial relief is not provided.

Rehan emphasized that a reduced interest rate would enable industries to restore production, manage costs more effectively, and support national economic objectives, such as increasing exports. He voiced concerns that numerous small and medium enterprises might face closure without intervention, resulting in increased unemployment and additional economic difficulties.

Rehan urged the government to prioritize essential sectors such as food and health, and to introduce concessional loan schemes to ease financial pressures on manufacturers, advocating for a supportive and industry-focused financial policy that encourages investment and production. He said that the country requires policies that boost real economic activity. Reduced interest rates will help revive industries, protect jobs, and stabilize the overall economic environment.

Analyst’s Perspective

Economic and financial analyst Ateeq ur Rehman noted the strong demand from the business sector for a substantial cut in the interest rate in the upcoming monetary policy. He stated that a decrease in the policy rate would offer much-needed relief for industrial revival and job creation.

The business community asserts that without adequate support for industries, rising unemployment, declining investment, and missed revenue targets could occur. Ateeq ur Rehman emphasized that the government and the State Bank of Pakistan should provide immediate relief by lowering rates to single digits to revitalize industrial activity, boost exports, provide relief for the country’s macroeconomic fundamentals, and potentially save an estimated Rs. 3.5 trillion annually by reducing the debt servicing burden.

Conversely, Ateeq ur Rehman pointed out that lower interest rates could lead to capital flight as investors seek higher returns abroad due to low returns on savings accounts, term deposits, and government bonds. Reduced returns may also decrease the incentive to save, particularly among younger workers.

He suggested that banks should consider the difficulties faced by their savings account holders, especially senior citizens, individuals with disabilities, pensioners, and endowment funds. He cautioned that reducing the interest rate should not diminish their income, which is essential for their dependency and livelihood. Typically, a reduction in the interest rate decreases the income of depositors, making it challenging for them to meet their needs.

Ateeq ur Rehman noted that the monetary policy faces a significant challenge in balancing economic growth with the needs of industry, businesses, and households. He emphasized that the policy should aim to provide relief to all stakeholders.