The national economy has been mired in a quagmire for several years due to a variety of local and foreign factors, resulting in inflation and unemployment, and there is no sign of a quick turnaround.
Among these factors are the war between Russia and Ukraine following the global breakout of Corona, the oil and gas crisis, and subsequently the impact of the worst floods in Pakistan’s history, as well as political upheaval.
In the current capitalist economic system, economic regulation of interest rates is important. When inflation rises, an attempt is made to minimise it by raising interest rates; however, this diminishes economic activity, which reduces national output and increases recession and unemployment.
The crisis has placed our national economy in a similar position.
Bank Daulat Pakistan quickly increased its interest rate from 15% to 16%. Inflationary pressures have been higher than expected, and this is likely to persist into next year. The current account deficit has been reduced to $2.8 billion, with the current fiscal year’s growth rate of 2% and the current account deficit anticipated to be around 3% of GDP.
According to the SBP announcement, the goal of hiking interest rates is to restrain the inflationary tendency, control the dangers to financial stability, and prepare the path for higher growth on a more sustainable foundation. During a period of economic decline, inflation is being stimulated by ongoing global and supply shocks that raise costs. This situation must be managed.
The decision is deemed imprudent by the Federation of Chambers of Commerce and Industry of Pakistan because Pakistan’s interest rate is quite high in comparison to Malaysia’s 2.25%, China’s 3.85%, India’s 4.5%, and Bangladesh’s 5.5%. Who will take a loan and operate their businesses at this rate? Our economic position is very uncertain; letters of credit are not being authorised due to the rising value of the dollar; industries are closing due to a lack of gas and electricity; and our products are not competitive in the global market due to high manufacturing costs. Under these conditions, additional increases in interest rates will completely kill the economy. The Federation of Chambers of Commerce and Industry’s position is supported by facts. The policy must be revisited.