Amir Khan

Traders and industry leaders assert that reducing the interest rate will offer essential support to the struggling manufacturing and banking sectors. Talking to WealthPK, Alnoor Textile Mills Private Limited Executive Member Amir Aziz said he believed that the government will adopt a pro-growth policy aimed at creating jobs, boosting exports, and reducing its burden by slashing the interest rate. Talking to WealthPK, Assistant Director at the State Bank of Pakistan's Monetary Policy Wing, Aurangzeb Kakar said the government's intention to generate more revenue than the economy could handle might result in higher taxes. This could drive up inflation and eventually affect the direction of interest rates. 

"The high interest rates have placed a considerable financial strain on the government, necessitating the allocation of approximately Rs7 trillion for debt servicing — an amount nearly equivalent to the total tax revenue for FY24," he highlighted. Kakar expressed concerns that the elevated interest rates contributed to a significant rise in defaults in 2023, with the banks encountering Rs70 billion in defaults, complicating their ability to lend at rates above the base rate, now adjusted to 20.50 percent. Moreover, the lending activity in FY24 has reached its lowest point, reflecting a sluggish economic activity.

This slowdown may result in a modest growth rate of 2.3 percent for the current fiscal year. Furthermore, the previous fiscal year (FY23) saw economic contraction, largely due to the stringent controls over imports. The industries dependent on imported raw materials were forced to either shut down or operate at minimum capacity. Although import restrictions were eased in the second half of FY24, they remain limited. "Despite these challenges, nearly all banks reported a double profit in 2023, primarily due to the high-cost lending to the government. Bankers anticipate that the government will need to borrow even more in the current year, as revenue projections in the budget seem uncertain," Aurangzeb pointed out. 

Talking to WealthPK, Dr. Eatzaz Ahmed, former memorial chairperson of the State Bank of Pakistan, highlighted lack of control over government spending as the primary reason for excessive borrowing and the unprecedented levels of domestic debt servicing. He emphasized the necessity of auditing the government expenditures, pointing out the lack of rigorous checks on fund allocation. Concluding, Dr. Eatzaz said as the fiscal environment evolved, influenced by government policies, inflation, and interest rates, these factors will continue to shape the economic outlook.

Credit: INP-WealthPk