Mohammad Jamil
The State Bank of Pakistan on Saturday maintained its policy interest rate unchanged despite increase in inflation. “After bottoming out in September 2015, both the Year-on-Year headline CPI (consumer price index) and period average inflation are on a rising trend,” the bank, in a statement, said. The bank said average inflation increased from 1.7 percent in September 2015 to 2.6 percent in March 2016. “Similarly, the Year on Year (YoY) core inflation measures kept their increasing trends. Non-food-non-energy inflation increased for the fifth consecutive month and the trimmed mean for the third month,” it added. But the bank has downplayed the increase in food inflation, as the prices of edibles, pulses and vegetables have increased manifold. The central bank said the budget deficit remained manageable in the first six months of the current fiscal year despite an increase in development expenditures.
The SBP expressed its concerns on declining exports. Trade balance in July-February 2015/2016 was at the same level of last the fiscal year despite pickup in quantum of oil machinery imports, it said. It is true that galloping inflation has been reined in due to the favorable impact of decline in the price of oil in the international market, yet there is no improvement in trade deficit. In fact, trade deficit during 2014-15 was more than $22 billion – the highest ever in the history of Pakistan. Even reduction in Pakistan’s import bill by $2 billion due to collapse of oil prices has had no salutary effect on trade deficit. Secondly, despite remittances of $18.5 billion from expatriate Pakistanis, current account deficit was more than $2.5 billion during this period due to falling trend in exports, which continues in the current year.
Business community and industrialists have been demanding a cut in the bank rate, as they believe that economic boom is linked with lower mark-up. 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. And there was further reduction in policy interest rate, which has been brought down to 6 per cent over the last two years. It should be borne in mind that any further cut in the bank rate is likely to discourage savings that are already lowest as compared to other countries in the region. Of course, interest rates are very low around the developed world; near-zero in nominal terms and negative in real terms, which is part of a deliberate policy by central banks to discourage savings and encourage borrowing/spending.
It has also been seen as a way of boosting the stock market and thus creating a wealth effect for individuals, and boosting confidence of big business in developed countries. With the revival of economy there, people in general benefit because it generates employment opportunities. There is also handsome pension on retirement, and the government also pays dole to the unemployed citizens. On the other hand, in the absence of such social benefits for the people of Pakistan, they have to save for their old-age or rainy days. But they would have little incentive to save if the interest is very low; or if inflation rises much faster than the interest one earns on his savings. 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 became victims of the big investors’ manipulations. During the last two decades, our economic managers envisaged that economy be driven by consumption rather than investment; and SBP had started reducing the policy rate in late 1990s. Since 1998 commercial banks reduced interest on ‘term deposit accounts’ and brought it down to 4 per cent from 9 per cent over a period four years. The experience indicates that the thesis of consumption as the engine of growth does not hold good in a developing country like Pakistan. And promoting consumption through incentives of lower rate of interest in a country with very low rate of savings and investment is not desirable.
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 also faces challenge of fiscal deficit 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 23 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. On the other hand, in order to attract investment in industry, tax concessions and incentives are given to industry.