ICCI President for drastic cut in high interest rate in monitory policy review to spur the economy

  • March 30, 2009
Government has been pursuing a tight monitory policy by repeatedly increasing the discount rate with the main argument to contain inflation, but this policy could not make a dent into the high inflation zone as it had a very limited influence on overall price behavior. Therefore, to remedy the situation, government should bring down high interest rate to single digit level in next monetary policy review which is likely to be announced in April, 2009. This was stated by Mian Shaukat Masud, President, Islamabad Chamber of Commerce and Industry in a statement.

Giving some facts, he said from July 2006 to-date, the discount rate has been increased by 600 basis points, including 500 basis points increase in 2008 alone. But inflationary pressure in the economy is becoming more severe with the passage of time while CPI has increased from 7.9 per cent in July 2006 to 23.5 per cent in February 2009. He said the high discount rate is directly promoting a high interest rate regime because higher the discount rate, more unbridled and unruly becomes the inflation. Therefore, an important objective of the on-going tight monetary policy is no where near to the goal.

Mian Shaukat Masud said the business community wanted high interest rate to be reduced by no less than 400 basis points in order to regain lost momentum of economic growth in general and industrial growth in particular that has been registering negative growth since the beginning of current fiscal year. He said drastic cut in interest there would also spur the economic growth and would combat the inflation as well. He said due to high interest rate, credit expansion has also shown a declining trend as it was recorded 10.4 per cent during first seven months of the current fiscal year against a target of 17.8 per cent. He said its effect would be clearly inflationary because of lower economic growth projected to be 2.5 per cent for the current fiscal year.

ICCI President said with the slow down in economy, government will not be able to get its tax revenue targets. Thus all these indicators show that high interest rate has put highly negative impact on business and industry as well as on the overall performance of the economy. Moreover, to cope with global recession and to stimulate the economies, all major countries have made hefty cuts in interest rates some bringing it even to zero level. It therefore, necessitates bringing a paradigm shift in the monitory policy by reducing the interest rate which in-turn would have a very positive effect on economic growth. He said if this trend is established, and economic activity picks up, some of the issues such as generating employment and tax revenue would start being addressed.