Skip to content

Pakistani Business Community Should Demand Coupon rate cut

January 17, 2015
logo

Coupon rate cut needed

By: ASAD RIZVI (KARACHI)   Published on January 17, 2015
As we are approaching the next SBP monetary policy announcement on January 24, I frequently read inBusiness Recorder (BR) that there is lot of hue and cry and pleading for bigger rate cut by the business community from all over Pakistan. In Thursday’s BR there was a report that Lahore Chamber of Commerce and Industry (LCCI) urged for a 300 basis point discount rate cut to support industrial sector.

With the sharp fall in inflation rate, the demand for easing of rate by bigger margin is absolutely justifiable, as it will help corporate sector to renegotiate its borrowing cost. But the cut is unlikely to increase any new or further business activity, because discount rate cut will be nominal in size, as there are many strings attached with IMF programme and hence, SBP’s hands are tied.

However, there are other hindering factors as well, that do not bode well for a deeper rate cut. It is the fondness of Central Bank for higher discount rate environment and inflation phobia, which are documented in almost all the monetary policy releases they have made during 5-years. If we look at monetary policy announcement (MPS) of past few years, it is worth noting that despite slashing discount rates on most occasions, feared possible future inflationary pressure. LSM and energy are the two favourite subjects that get space in its MPS, as SBP has never been growth-friendly and avoids discussing growth.

Now what business sector needs to focus and demand is removal of corridor, as floor and cap is the most damaging factor for the businesses to grow. It is important to understand that unless floor is removed business community will never get fresh funding, as Central Bank window is a 24-hour facility available to banks to park their excess funds.

SBP may argue that corridor helps to capture interest rate volatility. But Central Bank’s responsibility is not only to manage interest rate, which should be secondary. Growth should top its priority list, which is the real cause of increase in poverty and social unrest. Deposit/advance ratio that has reached pathetic low level is evident from my argument.

Another area of demand from the business community should be to call for an immediate cut of Bond Coupon Rate to adjust the yield curve or else discount rate cut will have minimum or no impact. Even with 100 basis point rate cut, banks will not take risk on corporate or any other businesses, as banks will remain comfortable by placing their investments in government securities due to better risk factor and exorbitant return by holding government bonds until maturity.

It is mind-boggling and very discomforting for the depositor because on December 01, 2014, 10-year Defence Saving Certificates (DSCs) rate has been revised down to 11.08 percent per annum, but 10-year PIB coupon still offers 12 percent six monthly return. This means commercial banks get better return on their investments than what a depositor is supposed to get by placing his funds in a bank, which is one of the major causes of fall in national savings ratio versus GDP. Based on these facts 10-year coupon rate should be slashed between 250 to 300 basis points to make DSCs attractive. What is more disturbing is that if we make a calculation of the rise of annual DSC portfolio, it is more because of rollover and interest rate accumulation rather than increase in amount by means of genuine investments. This ultimately hits the debt side, which is rising at a very sharp pace. With such a flawed policy weaknesses and hopeless vision, how can we expect economic turnaround in the true sense?

Copyright Business Recorder, 2015

http://www.brecorder.com/pages/article/1142961/2015-01-17/coupon-rate-cut-needed.html

Advertisements
Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: