THERE has been low investors’ confidence in capital equity market. This is owing to high interest rates and unstable foreign exchange rates. Always forcing exchange rates to match the real effective exchange rate (REER) (i.e., free-floating) causes more instability and do more harm than good in gaining investors’ confidence.
Large currency devaluation adversely affects the balance sheets of firms with the foreign-denominated debt. Huge devaluation increases the risk of huge earning losses.
On the other hand, high interest rates which are used to fight inflation make funds more expensive, discourage investment and limit growth. The cost of fighting low or moderate inflation by contractionary policies is more than inflation itself.
There is a difference between cost-push and demand-pull inflation and both are tackled differently. Currently, Pakistan has not been facing demand-pull inflation but there is a cost-push inflation.
Cost-push inflation is one of two main types of inflation. It refers to rising costs of production contributing to pricing pressures. For example, globally oil prices show an upward trend which increases the cost of production; combined with the external shock of currency depreciation.
In this scenario, increasing interest rates will further expose the business and corporate community to further external shocks.
I urge State Bank of Pakistan and the government to review their policies regarding interest rates and exchange rates with special consideration for business and corporate communities in Pakistan.
Published in Dawn, April 12th, 2019