KARACHI: Traders and industry are of the opinion that further cut in interest rates will benefit both manufacturers and banks, which are facing defaults of Rs70 billion in 2023.
It is expected that interest rates will fall to around 15% in the next fiscal year (FY25). The National Bank cut its policy interest rate by 1.5% to 20.50% on June 10, which is expected to have a positive impact on the economy.
“We believe the government will adopt pro-growth policies aimed at creating jobs, boosting exports and reducing the burden on the government by lowering interest rates,” said Amir Aziz, a textile exporter.
However, bankers are skeptical about a significant decline in interest rates during FY25. They believe that the ongoing issue of inflation will play a key role in determining interest rates in the next fiscal.
“The government plans to generate revenue far beyond the capacity of the economy. Higher taxes will fuel inflation and ultimately decide the fate of interest rates,” said a senior banker.
But many analysts expect interest rates to fall sharply in the new fiscal year after inflation unexpectedly fell to 11.8% in May, below central bank and market expectations.
High interest rates have forced the government into high debt and it will have to allocate around Rs 7 trillion for debt servicing, almost equal to the total tax revenue in FY24.
At the same time, bankers have also expressed concern that high interest rates will lead to a significant rise in defaults in calendar 2023, with banks facing defaults of Rs 7,000 crore and finding it difficult to lend at interest rates above the base rate of 22 percent (currently 20.50 percent).
Lending has plummeted to its lowest level in FY24, signalling weak economic activity in the country, with growth likely to be just 2.3% this fiscal year.
In contrast, the economy contracted in FY23, which industry experts and researchers attributed to strict restrictions on imports. Several industries dependent on imported raw materials were forced to shut down or operate at minimal capacity. Imports eased in the second half of FY24 but remain at a limited volume.
But nearly all banks reported a doubling of profits in calendar 2023, mainly due to higher-cost lending to the government. Uncertain revenue projections outlined in the budget mean bankers believe the government will need to borrow even more this year.
“There are no checks on government spending, which is the root cause of excessive borrowing and record domestic debt repayments,” the analyst said, speaking on condition of anonymity, highlighting the need for an audit of government spending due to a lack of strict checks on fund allocation.
Published in Dawn on June 23, 2024
