The interest rate has been reduced by 2.5%, marking an overall decrease of 5.5% since June 10 of this year. The rate has now fallen from a high of 22.5% to 15%.
This continuous decrease in the interest rate signifies that economic stability has returned to Pakistan. Additionally, inflation has declined beyond the expectations of both the IMF and the government. The current account deficit is now under control, though the Federal Board of Revenue (FBR) is still not meeting its tax collection targets. Apart from that, all economic indicators are heading in the right direction.
A reduction of seven percent over four months is significant, yet in a regional context, Pakistan still has one of the highest interest rates among neighboring countries. For instance, India and Nepal have a rate of 6.5%, Sri Lanka stands at 8.25%, and Bangladesh at 10%. With inflation now in single digits, Pakistan’s interest rate should also be in single digits, which would bring it closer to regional standards. This has been a longstanding demand of the business community, as high interest rates have made borrowing challenging for the private sector.
Although the interim and current governments have made tough decisions regarding the economy, the shortage of dollars in Pakistan created a black market that drove up the dollar’s value due to speculative trading. The dollar was also being smuggled to Afghanistan and Iran.
To stabilize the rupee, the Special Investment Facilitation Council (SIFC) took steps, along with the armed forces and law enforcement, to curb illegal dollar trading and black market activity. As a result, the dollar’s value quickly dropped, settling around 280 PKR, and it’s now trading in the open market between 277 and 280 PKR. Rather than a strict monetary policy, these administrative measures have helped stabilize the rupee.
A decrease in the interest rate will benefit the middle class as well. Those looking to buy a home, vehicle, or take personal loans will see relief. Industries often require expensive machinery and equipment, which are typically financed through loans. As these assets generate profits, the business can gradually pay off the loan and interest. When inflation drives up the base interest rate, however, it raises operational costs for businesses and dampens consumer spending.
When the base interest rate rose in Pakistan, many industries curtailed production. Although the economy is moving in the right direction, Pakistan still faces challenges like population growth, inflation, and unemployment. Addressing these issues is essential. If the government enacts reforms in the energy sector and promotes agriculture, the country could experience substantial growth. Additionally, large investors who had parked funds in banks may now bring them into the market due to the interest rate cut.
However, some argue that a reduction in interest rates may not necessarily lead to investment in industry, as funds might flow out of the country due to a lack of a conducive investment environment. There is currently no effective mechanism in Pakistan to prevent capital outflow. Therefore, merely lowering the interest rate is not enough; there should also be business-friendly facilities to encourage investment. Even now, a significant amount of capital is being transferred out of Pakistan to purchase properties in Dubai, with no checks or balances in place.
The issue is that the cost of doing business has risen so high that a lower interest rate alone may not have much impact. If the interest rate drops to single digits, the real estate sector could gain momentum. Although the government has imposed excessive taxes, it’s hoped that lower interest rates will revitalize over 50 industries linked to real estate, improving the quality of life for the common man.
While the business sector stands to gain, whether these benefits will trickle down to the public remains questionable. The business sector’s track record in this regard has not been encouraging. If the interest rate falls to 10% and the government stops paying Independent Power Producers (IPPs) one trillion in capacity charges, both the business community and the general public could see significant economic improvement.
Pakistan imports large amounts of wheat, edible oils, pulses, and fuel, while some payments for power generation are also made in dollars. This is why a rise in the dollar directly impacts inflation. The high interest rates have adversely affected industrial production in Pakistan. Industries like textiles, mobile and TV manufacturing, chemicals, food, beverages, and others have struggled under high interest rates. Pakistan should also strive to resolve disputes with neighboring countries and consider opening trade with India.
India and Pakistan could gain substantial trade benefits from each other’s resources. For instance, India lacks limestone, but Pakistan has ample supply, making India a potential large market for Pakistani cement. Similarly, we could adopt advanced agricultural techniques from India to reduce water wastage, a critical need in Pakistan. India could serve as a significant market for our products, and we could benefit from a competitive trade environment.
Pakistan currently has over 400 textile industries in operation. The textile sector needs to be competitive and further strengthened, as it plays a significant role in the country’s exports. The government should work to identify markets for Pakistani textiles at an international level. Pakistan also needs to improve cotton cultivation and support its agricultural economy by providing facilities to farmers.
With the increasing trend of digital payments, e-commerce, and online banking, there has also been a sharp rise in consumer complaints against banks in Pakistan. The banks operating in Pakistan seem unable to meet quality standards due to issues such as lack of technology, security concerns, and inadequate customer support. The Banking Ombudsman received 80% more complaints in the first half of this year compared to the same period last year, and provided relief worth over one billion PKR to consumers in the first nine months.
Although major global textile brands are manufactured in Pakistan, no industrial policy can succeed unless there is an uninterrupted supply of electricity and gas at competitive rates, a modern industrial infrastructure, skilled and experienced workers, modern banking, and a business-friendly tax system. Subsidies are also a significant problem in Pakistan; they should be targeted specifically. The process of providing subsidies should be curtailed, as subsidies often end up in the pockets of middlemen. Excessive taxation could further damage the economy and destroy businesses.
There is a need for a national consensus on an economic development agenda. Government institutions should play a positive role in creating a business-friendly environment. The bureaucracy needs a shift from a dictatorial to a consultative approach, requiring adaptation to the realities of the 21st century.