The government’s cost of debt servicing on its foreign debt of $61 billion is around $2 billion at an average rate of three per cent while its cost of debt servicing is $10 billion on its domestic debt of $80 billion (or Rs7 trillion) at the current interest rates. - File photo

LAHORE: With the State Bank to release its third bi-monthly monetary policy statement for the current fiscal on Wednesday, the business firmly believes that continuation of monetary easing is the only way forward for economic recovery and job creation.

“The reversal of monetary easing at this point will have far reaching and disastrous implications for the industry and jobs and pull down the entire economy,” warned Gohar Ejaz, a top business leader, while talking to Dawn on Friday.

He urged the central bank to cut its policy rate by at least two per cent next week to protect the existing jobs and encourage fresh investment in the industry to steer the country out of its current economic morass.

Others agree with him, saying the manufacturing already reeling under energy shortages is fast heading for bankruptcy unless the cost of credit is brought down to single digit.

The central bank, which has pursued a tight monetary policy since 2007 to unsuccessfully control rising price inflation, appears to have changed it stance since July and cut its key policy rate by 200bps to 12 per cent in the last four months to stimulate private credit demand and give economic growth a chance for generating jobs.

However, the businessmen consider the current policy rate too high and responsible for sluggish economy, falling investments, growing job and export losses and rising non-performing loans (NPLs), which have grown to Rs630 billion as of September 30, 2011.

“The impact of the high cost of borrowing is now starting to show in rising loan defaults, capacity closures and job cuts,” Gohar said. Still, he feels, the government and the central bank could salvage the situation by bringing the interest rates down to six to seven per cent to give the sickening industry a chance to recover.

“The rising stock of NPLs means the industry is finding it difficult to even service interest on its loans. So far, most businessmen who have defaulted on their loan repayments are somehow trying to keep their business afloat,” he said.

He said the high cost of funds was not only leading to industrial closures and defaults it was also the primary factor forcing the government to print new money and borrow heavily from the commercial banks to bridge its fiscal deficit.

“The government’s cost of debt servicing on its foreign debt of $61 billion is around $2 billion at an average rate of three per cent. On the other hand, its cost of debt servicing is $10 billion on its domestic debt of $80 billion (or Rs7 trillion) at the current interest rates. It means that the government is bearing a debt servicing cost on domestic debt of $80 billion equal to the cost it would be paying on the servicing of its international borrowing of $340 billion. This is a huge cost that the government, people and economy are being forced to pay because of high rate of interest,” he said.