January 23, 2002	Wednesday	Ziqa'ad 8, 1422

KARACHI, Jan 22: The State Bank of Pakistan on Tuesday cut its discount rate by another one per cent to 9 per cent to pull the economy out of slump. This is the fourth cut in a row so far this fiscal year. The new rate will be effective from Wednesday (January 23).

The State Bank had earlier cut the discount rate from 14 to 13 per cent in July and then to 12 per cent in August. On October 20 the central bank had made a huge two per cent cut to bring down the rate to 10 per cent.

Economists and bankers say the recent cut in the discount rate was very much expected. They say that a low inflation and stable exchange rate had created room for the central bank to lower the discount rate.

Discount rate is the rate at which banks can borrow money from the SBP for up to three days against approved government securities. As such it is regarded as one of the best benchmarks of lending rates. Bankers say the recent cut in the discount rate would encourage the banks to cut their own lending rates. The previous cuts in the discount rate had not drawn such a response from the banks for a number of reasons.

One of the reasons was that a large amount of banks profit was stuck up with the Central Board of Revenue in tax refunds. As the CBR has only recently promised to release part of that amount (Rs22 billion out of more than Rs55 billion) the banks are now able to respond to the cut in discount rate by lowering their own lending rates.

“I will say banks would now consider lowering their lending rates more seriously than ever,” said treasurer of a state-run bank. “The response will be much quicker,” said another banker.

Finance Minister Shaukat Aziz had grilled top bankers this month for their failure to respond swiftly to changes in the monetary policy. President Gen Pervez Musharraf had also taken notice of high lending rate of banks that had a crippling effect on the private sector business activities. Pakistan badly needs to revive its large scale manufacturing and attract investment to contain the economic slowdown. In the last fiscal year the GDP grew only 2.7 per cent against the target of 4.5 per cent.

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

Bankers said the one per cent cut in the discount rate ahead of treasury bills auction on Wednesday means that the central bank would also lower the T-bills yield. So far this fiscal year the SBP has made matching cuts in T-bills yield while lowering the discount rate: it has also reduced the coupon rate on long-term Pakistan Investment Bonds of various tenures.

Senior bankers said the inter-bank money market was calm on Tuesday with call rates lying flat around 1-1.5 per cent with surplus liquidity of more than Rs5 billion.

Businessmen have welcomed the State Bank move to cut discount rate. “It’s definitely a good move and will help business take off,” said a former chairman of All Pakistan Yarn Merchant