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[Watch] What are the causes of Interest Rate hike in Pakistan?

Amidst the fiscal deficits woes and rupee’s continuing slide against greenback, the State Bank of Pakistan (SBP) has increased the interest rate by another 150 basis points taking the existing rate to a staggering 12.25 percent in its latest monetary policy.

Amidst the fiscal deficits woes and rupee’s continuing slide against greenback, the State Bank of Pakistan (SBP) has increased the interest rate by another 150 basis points taking the existing rate to a staggering 12.25 percent in its latest monetary policy.

Prevalent inflationary pressure is what the SBP declares the main reason for the interest rate hike. However, this latest move has raised the eyebrows of certain economists in the country who see it detrimental to the economy.

One such voice is that of Raziuddin Razi who has written a letter to the SBP Governor asking him to bring it down to 4 percent.

Sharing his views with Matrix Magazine, Mr Razi feels the persistent increase in the rate has affected both the industrial and agricultural sectors adversely causing a negative growth owing to the availability of loans and credit at a much higher cost for acquiring machinery and other inputs. He fears that at this rate the current inflation will get converted into hyper-inflation compounding the economic issues.

Pakistan’s dwindling supplies is the main cause of inflation. Unlike US and Europe, where interest rate is used to fight consumer inflation, Pakistan cannot use the same weapon to fight supply driven inflation, Mr Razi maintains in his interview.

Citing his current 6 feasibilities, Mr Razi claims that the investment under the present lending regime might not invite the Foreign Direct Investment nor will it stop the capital flight from the country.

Therefore, the SBP should aim for a 4 percent interest rate to keep the growth steady. If at all, the SBP wants to increase the rate, it should be for private consumers availing loans and credit cards which can be as high as 22 percent, he suggests.

However, the rate for industrial and agricultural sectors should not exceed the 4 percent benchmark, Mr Razi concludes with a caution of a further rupee slide in case the rate is not brought down.

Under Special Arrangement with Matrix Mag

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