You have some spare cash and don’t know what to do with it. Would you be willing to enter into the following transaction with me — allow me to borrow $100 from you today and I promise to return $95 to you in five years’ time. Does that sound like a good deal?

How about if I offered you the opportunity to deposit your money in the bank and earn a grand total -0.5pc — you may withdraw your new sum of $95 in ten years’ time. Does that sound better?

For those of you wondering why I’ve got the simple concepts of borrowing, banking and returns the wrong way round, the truth is that the above are scenarios that many investors have had to face up to in the global economy over the course of the past two years. Negative interest rates on deposits and negative bond yields are now a reality of the global economic system — and, perhaps more worryingly, in real and not just nominal terms.

Negative interest rates on deposits and negative bond yields are now a reality of the global economic system — and perhaps more worryingly in real and not just nominal terms

Commercial banks in Europe are now effectively charging customers to deposit money — in some cases this is in the form of bank charges that are greater than the rate of interest being offered and in others a direct deduction from the deposited amount. The onset of negative interest rates is a result of the monetary policy being practiced by the central banks in the region — with rates being cut more aggressively in an effort to stimulate spending and growth.

Denmark, Sweden, Switzerland and the European Central Bank have already set their interest rates in negative territory and the Bank of England is heading in the same direction, with a historic low of 0.25pc announced earlier this year. The phenomena of negative interest rates is not restricted to Europe — Japan was one of the earliest proponents of the concept and put it into practice in 2016 in its increasingly desperate efforts to fuel economic growth.

The theory is simple — the population needs to be encouraged to spend to boost economic growth. Setting interest rates below zero as a monetary policy tool aims to encourage banks to hold less funds with the central bank and lend more. This should fuel more investment, and eventually spending in the economy, thus turning the wheels of prosperity.

In addition to encouraging them to lend, the negative interest rates should also force these banks to charge their customers negative rates for deposits, which should fuel further spending and economic activity.

However rational the theory is made to sound, it still sounds absolutely ridiculous to the layman — and it also begs the question as to how effective this monetary policy tool is.

So far, people have not resorted to storing money beneath their mattresses in the countries named above. This could largely be due to the fact that the negative deposit rates are currently being restricted to large corporates and particularly wealthy customers. The impact on the wider populace is yet to be felt by the banking system.

The result of the above tool on economic growth at present is, at its best, weak — monetary policy on its own has rarely proven sufficient to jump-start an economy, let alone in the current economic environment. Without structural reform to encourage investment, the tool goes a begging.

Pakistan too has been on the trend of declining interest rates — the State Bank reduced the rate to an all-time low of 5.75pc, which many deemed to be a surprise at the time. With the growth forecast already reduced in 2016, it is no surprise that the SBP is aiming to encourage banks to hoard less cash and instead lend to fuel growth.

With inflation at approximately 7.96pc and expected to rise, the SBP is implicitly trying to encourage the average consumer to spend more as well — the inflation rate is well above what can be earned on a term deposit.

However, as stated above, monetary policy on its own is not sufficient to bring about a turn-around in growth.

An abundance of investment opportunities and choice must exist for this to work — and Pakistan is far from such abundance at the moment. Rather, there is an abundance of other profitable avenues within which to park excess funds.

Given this situation, it is not hard to imagine Pakistan heading further down the road of negative interest rates — without structural reform such a situation is inevitable and economic growth will remain an unachievable goal.

Published in Dawn, Business & Finance weekly, September 19th, 2016