ISLAMABAD, Aug 30 (INP): Experts said high interest rates have a negative impact on small and medium enterprises (SMEs), reducing the ability to expand their business and profitability and ultimately resulting in unemployment.

Ayaz Ahmed, former research economist at Pakistan Institute of Development Economics Islamabad, told WealthPK that a high interest rate reduces bank credit to the commercial sector and increases the cost of capital to the borrower.

He added that due to the higher interest rate, interest payments on loans are more expensive, making it difficult for the firms to expand their business. In this situation, he said, SMEs are reluctant to get loans. It also reduces the investment of small businesses, making it difficult for them to remain profitable.

Ayaz said that high interest rates hurt firms' investment in consumer goods and services, ultimately reducing employment. He said such measures are adopted to control inflation, but the current inflation is not from the demand side, rather it is a supply-side phenomenon. He said rising prices of oil and goods on the international market and freight fares are the major reasons behind the current wave of inflation.

Ayaz further explained that since the Pakistani rupee has depreciated against dollar, importers have to pay more when they purchase goods. This causes high prices of goods on the domestic market.
Rana Muhammad Zaheer, owner of Rana Trading Corporation, a private company in Islamabad, told WealthPK that high interest rates impact consumer spending decisions. He said customers cannot afford their dream car due to a hike in interest rates.

Zaheer said sales of his company have declined due to high interest rates, which has also negatively impacted his profits. He said most customers purchase a car from his showroom by taking loans from banks. He said the purchase of cars and motorcycles is going beyond the reach of consumers due to inflation and currency devaluation.
Sajid Amin Javed, a research fellow at Sustainable Development Policy Institute (SDPI), said that SBP has maintained the interest rate at 15%. He said seasonal inflationary movements and speculative pressure on Pakistani rupee against the dollar must not dictate policy rate decisions. He added that the SBP had taken a good decision to maintain policy rate instead of increasing it.

According to Muhammad Shakeel Munir, President of Islamabad Chamber of Commerce and Industry (ICCI), high interest rates would hamper business growth. Despite the government's efforts to promote trade and exports, the private sector could not compete effectively because of high interest rates.
“The economy was overheated amid the second highest current account deficit of $17.4 billion recorded in the previous fiscal year that ended on June 30, 2022. The weekly inflation hit a record high of over 42% at the week ended on Friday, and the benchmark CPI (consumer price index) inflation spiked to a 14-year high at around 25% in July,” he mentioned.

“As Pakistan continues to reel through political and economic instability, inflation is consistently on the rise with the SPI (sensitive price index) showing an increase of 3.35% in the week that ended on August 18,” he added.

Credit: Independent News Pakistan-WealthPK