The new fiscal year has indeed started on a ‘positive note’ as the prime minister’s economic team apprised him last week of the gains made in the last couple of months.

But the fact remains that business sentiments are low and the economy continues to languish under the weight of harsh stabilisation policies being implemented as part of the $6 billion deal with the International Monetary Fund (IMF). The severe pain being felt by everyone is unlikely to go away any time soon.

Taking notice of the reports about growing unemployment and dropping private investment caused by the government’s fiscal and monetary policies targeting demand compression, the premier was reported to have directed his economic team to draw up a plan to stimulate growth and restore business confidence.

His direction was followed by a meeting of the Monetary and Fiscal Policies Coordination Board (MFPCB) to discuss options to “enhance economic activities in the potential areas of the economy with targeted policy interventions”. A press note issued after the board meeting dropped a hint or two that (the central bank) might reduce interest rates, a demand that is getting louder by the day as the economy comes to a near halt and private investment dries up.

“It was emphasised that (the) policy rate may be regulated in a way to confine (the) external sector vulnerability by focusing and prioritizing the export oriented sectors to generate more exportable surplus and become more competitive. It was agreed that (the) SME sector should be uplifted by providing it access to finance that will contribute to generate more export surplus and to create jobs,” the handout said.

However, State Bank of Pakistan (SBP) Governor Dr Reza Baqir’s remarks during his interaction with businessmen in Karachi last Friday put to rest speculations that the central bank could cut its current policy rate of 13.25 per cent any time soon. He told them, “We have to sustain our policies in order to gain the confidence of local and foreign investors.”

He didn’t stop at that and went on to say that the “real and true (policy) interest rate was only 0.25pc” given the fact that the average inflation rate for the entire fiscal year is estimated to hover around 13pc. This implies that the policy rate is unlikely to come down during the current fiscal year as the central bank targets to contain inflation, compress imports and attract foreign investment to shore up its reserves.

A member of the MFPCB, who requested anonymity because he believes he shouldn’t talk publicly on matters discussed in the meeting, ruled out the possibility of an “across-the-board reduction in the benchmark interest rates”. “Interest rates have nothing to do with the rise and fall of private investment. What matters the most for private investors is policy predictability and clarity, which the present monetary policy is targeting to achieve.”

Nevertheless, he did not rule out “preferential rates” for spurring private investment in the agriculture and SME sectors. “As far as exports are concerned, the currency devaluation has restored their competitiveness. Besides, the central bank has schemes in place to provide cheaper credit to exporters,” he replied in response to a question.

Many agree that it would be impossible for the central bank to cut the policy rate with the IMF macroeconomic policy framework already in place. Mian Muhammad Mansha, chairman of the Nishat Group, does not see the interest rate dropping in the near term although he fears a spike in bank loan defaults (resulting from the high credit cost and slowing business activities).

His message for the government: put the privatisation of low-hanging fruits, like National Bank of Pakistan and airports, on a fast track and help revive the construction industry if it wants to stimulate economic growth without jeopardising its deal with the IMF.

“The privatisation of the easier-to-sell state-owned enterprises (SOEs) will generate economic activity and help restore business confidence besides generating revenues for the government,” he said. “Simultaneously, the construction industry should be resuscitated to revive the 40 or so allied industries. Once the economic activity picks up and business confidence is restored, we will see an immediate revival of investment.”

Asif Ali Qureishi, chairman of Optimus Capital Management, believes the economy is likely to perform better than expected this year owing to the improved performance of the agriculture sector. He says the interest rate may be one of the necessary factors for the revival of business confidence and private investment, but a reduction in the cost of credit alone cannot lift sentiments.

“There are multiple factors that play a key role in wooing and driving away private capital. The interest rate is only one of the factors affecting investment and business sentiments. It matters only when investors borrow money, which they are not doing right now,” he said.

He was of the view that the government should engage investors, end the frictions hampering business and investment, remove the fear factor without compromising on the accountability of the corrupt and create industrial infrastructure. “Pakistan has ample opportunity, but the government will have to take the initiative and play the lead role. It will take time and much effort to revive subdued business confidence,” he concluded.

Published in Dawn, The Business and Finance Weekly, September 2nd, 2019