i ECONOMY

High interest rates hampering SME growthBreaking

March 29, 2024

High interest rates can have significant implications for small and medium-sized enterprises (SMEs) in Pakistan as they often rely on loans and credit facilities to finance their operations and expansion. Talking to WealthPK, Zulfiqar Ahmed, head of the media and communication wing of Rawalpindi Chamber of Commerce and Industry (RCCI), highlighted that currently, banks were charging a whopping 22% interest, which is very high compared to neighbouring countries, where it is less than 6%. He added that high interest rates meant that SMEs had to pay more in interest for any loans or credit they took to finance their business activities. "This can significantly increase the cost of borrowing, making it more difficult for SMEs to access the capital they need to grow their businesses." "High interest rates can discourage SMEs from investing in new equipment, technology, or expansion projects. This can limit their ability to grow and compete in the market, ultimately hampering economic development and job creation," he added.

He said to mitigate the impact of high interest rates on SMEs, policymakers should consider implementing measures such as interest rate subsidies, and targeted lending programmes. Concerns among top bankers are growing as they anticipate that numerous companies, particularly in certain sectors such as textiles (primarily spinning and weaving), steel rebar manufacturing, and poultry feed milling, may struggle to meet their debt obligations by the end of March 2024. SMEs, commercial enterprises, and small corporations often rely on real estate investments to repay loans, but with the real estate market in decline, generating cash for loan repayment has become challenging. Talking to WealthPK, Muhammad Asghar, coordinator of the Small and Medium Enterprises Authority (Smeda), said that the government offered a lot of easy loan schemes to develop SMEs in Pakistan. "Prime Minister's Youth Loan and a few other schemes are potentially popular. The interest ratio of many of these subsidised schemes is at 6% against a loan worth Rs1.5 million and 7% when it is increased to the given threshold."

Despite a period of unfavourable business conditions spanning several quarters, companies managed to service their debts partially by liquidating assets acquired during the previous boom. However, with the current economic downturn, companies are finding it increasingly difficult to maintain their debt obligations. In contrast, large vertically integrated companies are faring relatively better, having started deleveraging when interest rates began to rise. Additionally, their exposure to the real estate market is relatively minimal compared to the size of their operations. Nevertheless, some large textile firms are also feeling the strain. This situation underscores the urgent need for the new government to prioritise maintaining business stability and ensuring the cleanliness of banks' balance sheets. Encouragingly, the finance minister, hailing directly from the country's largest bank, is well-versed in the prevailing circumstances and should focus on implementing policies to mitigate the rise in defaults expected in 2024.

Credit: Independent News Pakistan