KARACHI: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Tuesday suggested the State Bank of Pakistan (SBP) to avoid further monetary tightening.
FPCCI is an apex body and organization of businesses and companies across Pakistan. The FPCCI established the Policy Advisory Board in 2021 with an aim to provide research-based expert input for policy advocacy, ease of doing business initiatives, and formalize the business community’s inputs on policies to various government departments, ministries, and institutions.
READ MORE: Another blow to construction industry: cement prices hovering near peak
Monetary policy, one of the core economic policies, is used across the world to tame inflation which is induced by high demand amid an overheated economy. The hikes in the policy rate however appear redundant globally as the recent inflationary spirals are mainly induced by supply-side factors.
The group of eight countries – Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland, and South Korea – which started raising interest rates aggressively well before America’s Federal Reserve failed in containing inflation but crushing their economies as the average ‘Core’ inflation of these eight countries touched a new high of nearly 10 percent year on year in December 2022 as reported by The Economist.
READ MORE: Steel producers reject allegations of ABAD
Inflation in Pakistan appears more entrenched which mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs, and other prescribed measures under the IMF program.
Despite the episodic hike in the policy rates by 725 bps from 9.75 per cent to 17 per cent between January 2022 and January 2023, general inflation surged from 13 per cent to 27.6 per cent over the same period. This raises the question of policy rate efficacy in curbing inflation.
READ MORE: Construction industry continues boycott steel purchase
According to the World Bank Enterprise Survey – 2013, Pakistan’s economy is weakly integrated with the financial sector with only 7 percent of firms raising finances via formal credit lending institutions. This is considerably lower than peer countries including India (21 per cent), China (25 per cent), and Bangladesh (34 per cent). In addition, Pakistan’s current policy rate of 17.00 per cent is well above the regional peers including China, India, and Bangladesh for which the policy rates are 2.75 per cent, 6.50 per cent, and 6.00 per cent respectively.
READ MORE: Housing construction comes to halt in Pakistan on high steel prices
The State Bank of Pakistan’s (SBP) approach to tame inflation by increasing the policy rate turned out futile and has adversely impacted the economy, deteriorated the fiscal equation of the country, and hit hard the already struggling business community. The pre-conditions for completion of the 9th review amid the resumption of the IMF Program are expected to fuel inflation further which can no way be tackled through levering policy rates.
The FPCCI has been regularly advising against regular increases in the policy rate and reiterates now against any further hike in policy rates. We strongly urge that the SBP should look into alternatives to combat the emerging inflationary spirals. Similarly, prudential regulatory measures should be utilized to curb demand pull in particular sectors as the monetary policy measures have differential impacts on the spectrum of industries and income classes.
In addition, more stress should be given to the Core Inflation as it excludes volatile components such as energy and food, and reflects a better position of the underlying pressures. Efforts need to be made to control price manipulation and hoardings in liaison with the respective federal and provincial government departments. An active and effective Competitive Commission of Pakistan (CCP) and an effective price control magistracy system also need to play their due role.
