How the Increase in the interest rates recently damaged the Pakistani Economy.
Pakistan is facing a trade deficit of about 35 billion this financial year. At the same time, the Pakistani rupee continues to depreciate sharply against the US dollar. Experts call the rise in interest rates extremely harmful to the continuation of business activities. The central bank had set an interest rate of 14.99% at the end of last month, much higher than the market expectations. The interest rate is also at a 22-year high. Not only this, but the interest rate among banks, i.e., Karachi Interbank Offered Rate (CABOR), has also reached the highest level in 13 years, which is present at 14.1%.
The rise in interest rate has been seen since the SBP’s Monetary Policy Committee, in its emergency meeting on April 7, raised the basic interest rate in the country by one and a half percent, and now the interest rate in the country is 12.2 percent. It’s five percent. Concerns are being raised about a further rise in interest rates, which is likely to add to the woes of the business community. But economists believe that this will increase the problems of the business community and increase the volume of government debt.
While raising interest rate will burden the government to repay loans, banks will benefit the most. The government of Pakistan borrows the most from local commercial banks, accounting for 70% of the total debt, while investors borrow the remaining 30% in the textile and power sector. After the hike in interest rates, he said that the government would have to pay higher interest rates on treasury bills and bonds issued. Their profits will increase further.
According to the SBP data, it may be recalled that Pakistani commercial banks had earned a profit of over Rs 450 billion last year as well. The US Federal Reserve also raised interest rates by 0.5% two days ago, which will create difficulties for other developing countries and emerging economies, including Pakistan.
In such a scenario, the primary question arises as to why there is a need to raise interest rates in the end. According to economists, when the central bank sees that the demand for goods in the country is increasing so much that it increases the inflation rate, then the interest rate should be increased to control the inflation and reduce the demand so that those who take loans from banks can take fewer loans. This reduces the demand and slows down the economy, reducing inflation.
But according to many economists, this is a weak argument in the case of Pakistan. In his view, the available information is not adequately analyzed, and there are many flaws. He said that the main reason for inflation in Pakistan is not an increase in demand but rising commodity prices in the global market. The sudden and excessive increase in interest rates is highly unfair and is disastrous for the EconomyEconomy, exports, and industries. The rise in interest rates would profoundly negatively impact export performance, utterly disastrous for initiatives and future investments. According to economists, due to high-interest rates and the high cost of doing business, no investor will come forward to set up an industry in the country. A rise in interest rates could trigger economic activity. Investors and traders say that raising interest rates will increase the cost of new projects.
‘Economy is being run on loans instead of economic strategy.’
The only way to control inflation is not only to raise interest rate, but Pakistan, like many developing countries, will have to find a way to control inflation. According to him, the government does not have any economical strategy to build the country’s EconomyEconomy on a solid foundation. The Pakistani Economy is becoming utterly dependent on obtaining loans. The government borrows from local banks, international financial institutions, or countries to cover its growing budget deficit. Even more, loans are taken to pay interest on the loans.
Economists say obtaining expensive loans without any economic strategy can only temporarily improve the financial situation; a permanent solution is to increase exports and reduce imports while attracting remittances and foreign investment. It aims to reduce the budget deficit by reducing government spending while providing a better environment. To reduce the current account deficit, it is necessary to control unnecessary and lavish imports. In contrast, to reduce the budget deficit, it has become essential to establish economic discipline in government institutions.
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