KARACHI, Oct 20: The State Bank on Saturday cut its benchmark discount rate by 2 per cent to 10 per cent to pull the economy out of the recent slump. This is the third rate-cut so far during this fiscal year. SBP said the new rate is effective from Monday.

The SBP had earlier lowered its discount rate from 14 to 13 per cent in July and then to 12 per cent in August. Economists say low inflation and stable exchange rate have encouraged the State Bank to make a big 2 per cent cut in discount rate in one go.

The cut in discount rate is aimed at kick-starting the economy that grew 2.7 per cent in fiscal July/June 2000-01 against target of 4.5 per cent.

Economists said the decision was well-timed but they were not sure if it would lead to the desired level of economic growth.

The target for GDP growth in this fiscal year is 4 per cent.

Business leaders also welcomed the cut in discount rate. But they urged SBP to make sure that it translates into lowering of banks lending rates.

“The decision is timely and in the right direction,” said well known independent economist Dr. Akbar Zaidi.

“But unfortunately interest rate in Pakistan does not reflect in the investment climate and decisions,” he said when reached by Dawn over telephone.

“The cut in SBP discount rate is welcome, but the SBP governor should make sure that it results into lowering of banks lending rates,” said Mushtaq Vohra Vice Chairman of All Pakistan Textile Mills Association.

“We cannot fully take advantage of the increase in our textile quota and cut in import duty on Pakistani textile made-ups by the EU countries unless our financial cost of production comes down,” he said when contacted by Dawn over telephone.

“The banks must read the SBP signal and cut their own lending rates immediately.”

The views expressed by Dr. Zaidi and Mushtaq Vohra are shared widely among economists and business leaders.

Economists say low inflation and stable exchange rate have led SBP to make a major cut in its discount rate.

Annualized inflation measured by consumer price index stood at 2.92 per cent at the end of the first quarter in September. At the same time the rupee also gained more than 3 per cent in the inter-bank market.

But whether the cuts in SBP discount rate that would surely be followed by cuts in treasury bills would meet the ultimate objective of making cheap credit available for investment as well as for daily business operations? The answer depends on whether the banks cut their lending rates — and if so how quickly. Though banks generally respond to changes in the monetary policy with a lag of several months in Pakistan, businessmen feel if it happens now the easing of the monetary policy would not be able to pull the economy out of sluggishness. “The banks must respond quickly as it is time for the private sector borrowing,” said Mushtaq Vohra.

In Pakistan the demand for the private sector credit picks up in October and continues through March next year.

The recent cut in SBP discount rate is a little belated but still in line with the easing of monetary policy by the central banks around the globe. The Fed and the European Central Bank as well as Central Bank of Japan have all cut their benchmark interest rates in the recent past to pull their economies out of the US-led recession. Many other central banks have also followed the suit — following the advice of the Fed chairman Alan Greenspan. He had advised the central banks of the world last month to ease off their monetary policies to ward off the spillover impact of the US-led recession.