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Pakistan's discount rate is down but will it work?

Summary: A more than expected cut in discount rate has just been announced to expand bank credit and business and check inflation.

A more than expected cut in discount rate has just been announced to expand bank credit and business and check inflation.

But before it does any good to the stagnant economy, its motives are being questioned. Will it, or can it, bring down inflation, both hidden and known? Can it expand bank credit for business and industry? Anwar Yasin, governor, State Bank of Pakistan (SBP), central bank, stands firm on his conviction that it will attain both key objectives to achieve, which he has cut the benchmark discount rate (DR) from 12 per cent to 10.5 per cent. DR determines band of lending rates, commercial bank will charge their customers over next two months -- effective from August 13.

Yasin's critics accuse SBP of bowing to the present Pakistan Peoples Party (PPP) government, which is expected to be dragged by the oppositions into facing general elections. The belated aim of the PPP government is to improve its poor performance and try to stimulate business, make the growth perk up, and generate jobs, before it goes to poll. The DR cut is justified, Yasin insists.

"Improved inflation figures and a better outlook on this score, and a decline in loans to the private sector has led to increase in real interest rates," he said. SBP governor points out: "Year-on-year inflation has declined to 9.6 per cent in July, 2012 from 12.3 per cent in May 2012 on the back of unanticipated fall in international oil prices in May and June."

But what forced the SBP to bring down the DR was the almost alarming reduction in bank lending to the private sector. Fiscal Year 2012 ended June 30, saw commercial bank credit lending to the private sector trickle to an all time low of mere Rs18.3 billion -- compared to Rs173.2 billion in fiscal year 2011. There were several other reasons, hitting the economy, Yasin says. "The main factors that significantly dampened the demand for credit by the private sector for business are persistent electricity and natural gas shortages, security conditions, and a challenging political environment," Yasin asserts.

SBP has "no concern over the balance of payments position for fiscal year 2013 as capital and financial accounts are expected to improve this year," Anwar says.

Additional inflows under Western-US Coalition Support Fund amounting to $1.8 billion or more. FDI inflows will witness some additional pickup. Home remittances from overseas Pakistani, including those working in the UAE, Gulf, Saudi Arabia, US and UK rose to a record $13.2 billion in fiscal year 2012 and are projected to rise further in fiscal year-2013 as July, the first month of the year recorded an inflow of $1.2 billion. GDP will remain in the 3-4 per cent range in fiscal year 2013 -- lower than the government target of 4.3 per cent.

How did the business reacted to the DR cut by 1.5 per cent to 10.5 per cent? The country's premier bourse -- Karachi Stock Exchange turned quickly bullish. Its KS-100 index rose to a 51-month high of 14,912 -- up 150 points, and a three month high turnover of195 million shares changing hands, on the back of the DR cut. Economist Dr Hafeez Pasha, a former Advisor Finance in the cabinet, termed the rate cut as "a pre-election move."

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Aug 19, 2012
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