Mohammad Jamil
State Bank of Pakistan lowered its benchmark interest rate by 25 basis points from 6 percent to 5.75 percent, what it said, to boost economic growth. In fact, lowering bank rate is subsidy to the industrial and business class at the cost of the common man. Business community is of the view that a tiny percentage of 0.25 per cent would not make much difference. Though, the central bank said real GDP growth is set to exceed its FY15 outcome of 4.2 percent, it will remain below its target of 5.5 percent. Negative agricultural growth due to cotton and rice crops, decline in production and exports are the reasons for failure to achieve economic growth target. Thanks to IMF loan tranches, foreign exchange reserves are projected to maintain upward trajectory. Inflation is said to be increasing because of increase in domestic demand, then even this slight cut in interest rate is unwarranted.
It is true that galloping inflation had been reined in due to the favorable impact of decline in the price of oil in the international market. From January 2015 to September 2015 SBP had reduced the key policy rate from 9.5 per cent to 6 per cent, which was unprecedented. Even reduction in Pakistan’s import bill by $2 billion due to collapse of oil prices had no salutary effect on trade deficit; and despite remittances of $18.5 billion from expatriate Pakistanis, current account deficit was more than $2.5 billion during the above period. According to the data of Pakistan Bureau of Statistics, exports have been witnessing a falling trend since July 2014; however imports rebounded which was reflected in higher volumes of machinery, food products, transport, agriculture and chemicals. Business community and industrialists should rationalize their imports and strive for increase in exports.
Business community had been demanding lowering of interest rate. From 2012 to 2013, the State Bank of Pakistan had already brought down the policy rate from 14 per cent to 9.5 per cent, a reduction of 4.5 percentage points, yet Pakistan did not see any significant improvement in economic situation. Anyhow, these cuts in the bank rate are discouraging savings because the government reduces interest in National Savings Schemes and commercial banks also pay less interest to depositors, meaning that savings rate will further decline. In the past, such policy had forced the potential savers to turn to other riskier alternatives i.e. stocks, bonds, or funds. In late 1990s, when interest rate was low, people had started investing in shares of companies listed on stock exchange. Since they were not shrewd investors, they had become victims of the big investors’ manipulations and lost a part of their savings.
Apart from abysmally low tax to GDP ratio of 9 percent and excess of imports over exports, lower rate of savings is another reason that Pakistan has to resort to loans from banks and the IMF. Pakistan faces challenge of fiscal deficit also because our governments have not been living within their means. Moreover, rich are not paying the taxes due from them, by resorting to tax evasion one way or another. Agriculture contributes about 22 per cent to the GDP, but federal government is skirting the issue of imposing tax on agricultural income by taking the plea that it is a provincial subject. The fact however remains that most members of assemblies are from the feudal backgrounds, and they resist imposition of tax on income from agriculture. The culture of tax evasion has to be changed, and the government should impose direct taxes instead of indirect taxes, which are passed on to the consumers.
