Too little, too late

June 29, 2020

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THE surprise policy rate cut of 100 basis points to seven per cent by the State Bank of Pakistan (SBP) last week was greeted warmly by the stock market on Friday when the benchmark index climbed 230 points and settled at 33,939. Investors picked up shares in leveraged sectors, hoping for growth in their earnings.

Most analysts at major brokerage houses also peddled the virtues of the rate cut. But people in the thick of the real business world generally waived it off as a non-event.

Ahmed Chinoy, elected director of the Pakistan Stock Exchange (PSX), was not exactly jubilant over the rate cut. He said such largesse just five days before the end of the financial year will have no impact on upcoming company results.

Regarding the stock market, he said it offered an average return of 7-8pc, which was subject to a high capital gains tax rate of 15pc. “What was the fun in putting money in a risky investment class for a minuscule return?” he asked.

Shares provided a wafer-thin return of 0.1pc, with the KSE-100 index crawling to 33,939 points on June 26 from 33,902 on June 28, 2019

That was the thought that possibly crossed the minds of people with investible funds and even small savers. Between June 28 last year and June 26, equities provided a wafer-thin return of 0.1pc with the KSE-100 index crawling to 33,939 points from 33,902. The return on treasury bills dropped to 7.4pc on June 26 from 13.1pc on June 28, 2019. The yield on Defence Savings Certificates declined to 8.1pc from 13pc while bank deposits yielded 5.1pc as opposed to 5.7pc a year ago. The return on Pakistan Investment Bonds (PIBs) collapsed to 8.8pc from 13.7pc in June 2019.

The exception was the return on the dollar, which worked out at 4.8pc as the exchange rate climbed to Rs167.70 from Rs160.10 a year ago. Only gold glittered as it provided an incredible 25.1pc gains with its price reaching $1,764 an ounce from $1,409 a year ago.

Mr Chinoy, who is also the chairman the Pakistan Cloth Merchants’ Association, contended that entrepreneurs had been struggling with the average interest rate of 11-12pc. “Only 30pc of the favoured clients are offered financing by banks and that too at 2-2.5pc above the (policy) rate,” he said. “The rest of the 70pc industrialists finance their businesses through their own sources,” which is why a flip-flop on the policy rate has little impact on business at large.

Mr Chinoy said interest rates have to be dragged down to 2-3pc to make business viable. He seemed amused by the merriment over the surplus of $13 million in the current account balance for May as opposed to a deficit of over $1 billion in May 2019. “Simply stated, it means there was no business done.”

He said the government has to draw up stable, long-term policies and create confidence in the minds of entrepreneurs to jump-start economic and industrial activities. “Who would want to take the risk with the lurking fear of the National Accountability Bureau (NAB) and other authorities that start to smell the trail of money that a perfectly clean entrepreneur brings into the country? It is for the government to bridge this trust deficit in order to attract fresh investments.”

Iqbal Ibrahim, CEO of Orient Textile Mills, said export orders are received six months in advance so all that is happening has had little impact on exports so far. Goods are being shipped as usual, he said. The full impact of the global crisis will begin to show up September onwards. “October-December will be the months to watch,” he said.

Christmas and New Year’s consumer spending in the West will determine if the recession has started to bite. He said export-oriented firms will frame policies keeping an eye on the trend. If demand remains strong, local companies will dispose of current inventory even at a loss and replace it with fresh inventory for exports. “No company can afford to lose markets for that will be suicidal,” he said.

In the next phase, textile exporters might have to face cut-throat competition with exporters from India, Bangladesh and Cambodia. Mr Ibrahim did not make much of the interest rate cut and said the profitability of enterprises was subject to as many as 10 factors.

Tahir Abbas, head of research at Arif Habib Ltd, said efforts to revive growth and moderate inflationary expectations anchored the decision to cut the interest rate. “The monetary policy committee also highlighted that Rs3.3 trillion worth of loans are due to be re-priced in July. Hence, it was an opportune time for a rate cut so that benefits of lower rates could be passed on to households and businesses,” he said.

Published in Dawn, The Business and Finance Weekly, June 29th, 2020