Monday, June 17, 2024
Main Menu

Debunked Monetary Policy to shut industries


Islamabad: Pakistan’s industry in general and the steel sector in particular are fighting for sheer survival and are greatly concerned with the current economic situation that is getting worse day by day. The industry fears of more burden which is expected in the upcoming monetary policy of State Bank of Pakistan, due to be announced in its Monetary Policy Statement on August 22, 2022.

The key rate currently stands at 15%, which is highest since the last two decades last seen in April 1999. The industry experts believe that the unbearable benchmark interest rate of 15% is unsustainable for the industry. Comparing it with other regional countries, the benchmark interest rate in Malaysia was 2.25pc, Indonesia 3.5pc, China 3.7pc, Bangladesh 4.75pc and India 5.4pc

The upcoming Monetary Policy Statement will be disastrous and is set to shutdown industries of Pakistan and create unemployment if the interest rate is not reduced effective immediately.            

The SBP has raised rates in previous 7 meetings since September 2021, cumulatively increasing the interest rates by 800 basic points and is expected to hike further. Pakistan Association of Large Steel Producers (PALSP) notes that it is impossible for any businesses to plan expansions or working capital with such abrupt changes.

Secretary General PALSP, Wajid Bukhari, states, “Such fast hikes are a perfect recipe to shut down businesses. How can a business sustain if an interest rates doubles in only 8 months, whereas your regional peers are at around 2-5%?”

Industries are facing problems as Banks are not opening LCs for raw materials. Further exacerbating the situation, spare parts and even consumables falling under Chapter 84 and 85 have become impossible to seek approval from SBP, leading to shutdowns imminently. “Our members are complaining that SBP has become defunct and approvals are just not coming, whereas banks are hesitant to open LC’s for raw materials.”

The steel industry, which is capital intensive business and due to worsening economic condition is already facing severe liquidity crunch, whereas many small to mid-sized mills have already shutdown. This will structurally damage the Industry for decades to come.

Pakistan’s scrap imports amounted to 164,699 mt in May this year, the lowest since March 2014, decreasing by 47.6 percent compared to April and by 38.2 percent year on year. In the month of June, scrap imports ranged at around 210,000 MT, whereas July scrap imports are tentatively less than 100,000MT range, making it the lowest in the last two decades. Mills have started to shut down and supply chain shocks are only adding fuel to the fire.

The Govt set an inflation target at 11.5% for this fiscal year but the SBP has given an inflation range of 18% which is still very high considering falling oil prices, softening of commodities and revaluation of the rupee. Bukhari further noted, “With June and July core inflation clocking in at 11.5 and 12 percent, respectively, the range given by the MPC is absurd. Furthermore, they disastrously fail to comprehend that abnormally high policy rates cannot fix supply chain related issues. It has nothing to do with demand pull inflation so MPC is consciously making a flawed decision, resulting in closure of industries and increase of joblessness.”

Other countries have demand-based inflation whereas Pakistan pricing pressures are import related resulting in a depression of an already fragile economy by crushing the demand to a standstill. Cement sales in the month of July have fallen by 60%, whereas automobile sales have been crushed by 89%. PALSP stated, “the numbers are evident that MPC overreacted and crashed the already ailing economy to a standstill by hiking the key rate by 800bps to an all-time high for the last two decades. MPC states that they are independent, but they are not independent to the 220million population and must be held answerable to justify increasing crime and homicide rates, shutdown of businesses, and a record joblessness. The flawed MPC decisions shall have reverberations in investments and jobs for future generations. The current policy rate must be reduced if we want our country to survive.” Pakistan needs to create 4.5 million jobs over the next five years as per UNDP report. Right now, jobless rates are increasing at the fastest pace in the history of Pakistan.

If we take UK as an example, it doesn’t justify Pakistan to have higher rates than 10.35% as per SBP own inflation assumption of 18% today and comparing to UK which has real negative rate of 7.65%.  The United States currently has a negative real interest rate of 6% today. Bukhari concludes, “MPC has failed our Nation and the current policy rates do not make any logic other than a grand scheme to shut Pakistan down. The policy rates have to be in single digits in line with our regional countries.”

Comments are Closed