ISLAMABAD: Pakistan Association of Large Steel Producers (PALSP) urges State Bank of Pakistan (SBP) to cut interest rates during the upcoming monetary policy meeting.
Steel industry, the mainstay of Pakistan plays a key role in Pakistan’s economic environment, providing direct employment to more than 300,000 individuals and acts as a robust support system for a number of downstream industries, directly affecting 7.5 million jobs in different sectors. However, the steel industry is now facing an existential crisis due to an unprecedented lack of liquidity, arising from a combination of reduced working capital and weakened purchasing power of the mills as a result of the colossal increased capital requirements. This dire situation has already forced the closure of several small to medium-sized steel mills, resulting in significant job losses. If the current sky-high interest rates persist, the sustainability of the steel industry remains at risk and the looming unemployment crisis will become an issue to be addressed by both the SBP and the government must solve.
Currently, the SBP’s key interest rate is at a staggering 22%, a level not seen since early 2011. This interest rate is highest compared to other countries, making Pakistan’s domestic steel industry uncompetitive and unsustainable.
Shockingly, while the central bank interest rate for Pakistan’s industries is at a record high of 22%, it pales in comparison to rates in neighboring countries such as 6.5% in India, 3.45% in China, 6.5% in Bangladesh, 2.5% in Thailand, 6% in Indonesia, 3.65% in Vietnam, 10% in Sri Lanka, 1.875% in Taiwan and 3% in Malaysia.
According to a recent report by JS Global: “Based on 12-month forward CPI, real interest rates have since turned positive.
September 2023 and are expected to experience significant expansion at a current rate of 22%. In the absence of of negative CPI surprises, the SBP has an opportunity to start monetary easing earlier than expected.”
On average CPI over the next 12 months is 19%, reflecting a positive real effective interest rate of 300 basis points. Until January 2024 shows a 12-month forward CPI positive real interest rate of 7.25 basis points. In light of these developments, SBP must consider a substantial 500 basis point interest rate cut at the upcoming Monetary Policy Committee (MPC) Meeting.
Wajid Bukhari, General Secretary of PALSP, emphasized the urgency of the situation and stated: “Given the high interest rates, Pakistan’s government’s debt service has climbed to 7.6 trillion rupees, consuming most of the federal government’s net income.
These rates simply do not make sense and the SBP needs to act urgently to help create fiscal space for the government to do infrastructure projects which are absolutely necessary after the record floods witnessed in Pakistan. The government must realize the gravity of the crisis and take immediate measures to support businesses and encourage investment in Earth. Implementing pro-business policies is not just about preserving jobs in the steel industry; is essential for overall economic well-being of Pakistan. The health of the steel industry has a direct impact on the wider economy.
Our policy makers must focus on creating an enabling environment and formulating long-term policies to support our local environment industries.
