INP-WealthPk
Policy Rate Hike to Hamper Economic Growth
April 18, 2022
By Jawad Ahmed
ISLAMABAD, April 18 (INP-WealthPK): The increase in policy rate by the State Bank of Pakistan (SBP) in order to curb inflation and replenish the depleting foreign exchange reserves will have little effect on inflation and instead hinder economic growth, said Dr. Saud Ahmed Khan, Assistant Professor at the Pakistan Institute of Development Economics (PIDE), Islamabad.
Talking to WealthPK, Saud said raising the benchmark policy rate to 250 points will calm the economy for a short term but weaken it in the long run, which will compel the SBP to raise its base point again after a quarter. The interest rate climbed to a staggering 12.25% from 9.75% after the monetary authority decided on a 2.5% hike in the benchmark policy rate.
“This step would not only discourage private investment, but also limit economic growth and exacerbate the country's unemployment situation,” Saud Khan said.
He added that most of the economies including Europe, Australia, US and Japan cut interest rates near to zero during Covid-19 to keep their economies from recession.
The US Federal Reserve cut interest rates 3 times in 2019 as the economy showed signs of slowing, and twice in 2020 to near zero to curb the economic effects of the coronavirus pandemic. On the other hand, the SBP has maintained a tight monetary policy by raising the interest rate during the pandemic, Saud told WealthPK.
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Source: State Bank of Pakistan (SBP)/ WealthPK Research[/caption]
“The dynamics of monetary policy in Pakistan diverge from those in theory. According to historical data, Pakistan's inflation rate has risen sharply rather than decreasing as a result of tight monetary policy,” he remarked.
The banking industry has seen substantial growth in revenues during the pandemic because of the high interest rate, while the industrial sector has seen a major drop in growth. The annual GDP growth rate of the country for FY2020 was estimated at negative 0.38 percent.
Pakistan's budget is usually in deficit, necessitating loans from both domestic and international sources to cover the gap. According to Saud Khan, further increases in interest rates will exacerbate the country's debt burden.
He said Pakistan’s economy was moving towards recovery following the epidemic, as all economic indicators were showing a positive trend. The rising markup rate undoubtedly hampers industrialization and expansion of private business.
He urged the policy makers to establish policies based on historical trends and facts in order to bring the economy on the right track for development.
