Reducing Interest rates



Whenever interest rate go  up, banks prefer investing in government securities instead of providing credit to private sector and the same is happening right now in Pakistan. The businessmen need borrowings from banks to expand existing businesses and invest in new start-ups, but policy rate of 13.25 percent has made bank borrowing very costly for them due to which they were facing problems in promoting business activities.

The government needs to bring down the key interest rate to single digit level for reviving business activities as due to high interest rate, production cost and cost of doing business has increased manifold causing drastic slowdown in business activities and halt in new investment.

The current government also financed the bulk of fiscal deficit through borrowings from the central bank due to which inflation shot up and government adopted a tight monetary policy throughout the year to check inflationary pressures. But this approach crowded out the private sector from the credit facility. Due to this factor, the performance of all major industries during 2018-19 including food, beverages, petroleum, pharmaceuticals, chemicals and automobiles remained in negative while the growth of SMEs also suffered badly.

The value of rupee experiences sharp depreciation during the tenure of current government which might have facilitated the growth of exports. However, due to high interest rates, export-oriented sector has suffered greatly. Therefore, the government must provide interest-rate subsidy to the export-oriented industries and bring down interest rate to below 10 percent so that businesses could get credit at affordable cost from banks and focus on promoting business activities. It will create multiple benefits for the economy as growth of businesses will create new jobs, attract more investment, improve tax revenue and promote exports.

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