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Industrialists prefer single digit

December 02, 2012

A man folds fabric at a textile factory in Faisalabad, Pakistan. – AP (File Photo)

 KARACHI: Industrialists believe that the best way out of the fiscal tight spots is to fight inflation by increasing supply of goods and services.

The high cost of finance has dampened industrial activity which had a snowball effect on the entire economy, they add, stressing that the current economic slowdown is the outcome of high discount rate which even today stands at 10 per cent.

Haji Fazal Kadir Khan Sherani, of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), said it was encouraging that the discount rate had been brought down to 10.5 per cent in a series of cuts over the past two years. However, he reiterated that the discount rate should be in a single digit in view of the extraordinary challenges that the country was facing wherein several economic indicators are depicting negative trends.

The FPCCI chief said that over the past several years the foreign direct investment (FDI) had witnessed a serious decline, manufacturing activities were in a slump, and industrial units were reportedly pulling the shutters down. These circumstances, he said, warranted an even lower discount rate to encourage investment, revive the industry and rejuvenate the overall economy.

He further said that under the current economic conditions there was little hope that banks would be willing to lend to the private sector for creating new economic opportunities. He blamed the government for pushing the country to such an impasse. The irresponsible attitude of the incumbent government towards using bank borrowing to finance expenditure did not only have a negative impact on the economy as a whole, but even crowded out the private sector from bank funding.

M. Jawed Akhai, Chairman of the Pakistan Pharmaceutical Manufacturers Association (PPMA), said that normally banks charge two per cent premium over and above the Karachi Inter Bank Offering Rate (KIBOR), therefore the current interest rate is 12.5 per cent and not 10.5 per cent. He also urged the government to bring down the discount rate to single-digit level.

Responding to a question, he wondered why the banks would lend to the private sector when they can park their funds risk-free with the government at attractive rates.

Undoubtedly, Mr Akhai said, high discount rate was one of the main obstacles to economic growth but other issues such as energy shortage, high fiscal borrowing, law and order situation do have their own dimensions and one cannot gauge the intensity of each problem over the others.

Ahsan Bashir, Chairman of the All-Pakistan Textile Mills Association (Aptma), said that in entire South Asia, the maximum rate was 7 per cent, but in Pakistan it had been in double digits for a long time. As a result, he said, there had been no expansion in the textile industry which is the largest industrial sector of the country. On the contrary, many units have either closed down or have relocated to other regional countries.

As the government has crowded out the private sector from bank borrowing, Ahsan Bashir said there were not other sources of funding because the capital market is shallow and the only option left for the industry was equity investment.

He further said that in India, industrial finance was entirely met by the central bank and only consumer financing was carried out by private banks, but in Pakistan private banks were dealing in that area as well. Pakistan was following the Western model though its systems and economy was still not mature enough to face market economy challenges, he added.

There was a time when in Indonesia most of the borrowing from the banking sector was made by government. However, the central bank intervened and made it mandatory upon the commercial banks to finance up to 25 per cent of their lending to the corporate sector. This is how, he said, the regulators have to work to ensure industrial growth and create jobs.

The APTMA chief suggested that the government should provide funds at zero rates to the private sector to invest in energy projects for a period of 10 years. This, he believed, will help resolve the energy crisis in the shortest possible time.

Parvez Ghias, Chairman of the Pakistan Automotive Manufacturers Association (PAMA), hoped that in the next bi-monthly monetary policy, the discount rates may go down 50 to 100 basis points.

He further said that with margins getting severely squeezed, the banks whose business is to lend should be willing to do so in order to build their asset side of business rather than simply invest in treasury bills.

Responding to a question, Parvez Ghias said frankly, “I feel energy management along with law and order are the biggest obstacles to growth in the country.”

If the State Bank of Pakistan brings down the discount rate to a single digit, he thinks, the rupee would remain under constant pressure in the next 12-18 months. This will certainly push up the prices of CKD kits, raw material and other consumables. All of this does not auger well as this would dampen auto industry’s performance, he added.