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Interest Rate Hike: How will it impact Pakistan’s economy?

FILE/ONLINE

The State Bank of Pakistan has increased the interest rate by 2.5%. According to the monetary policy issued by the SBP, the basic interest rate has been raised to 12.25%. The decision was taken due to imbalance in foreign payments and inflation. After that, interest rates in Pakistan have become the highest in the region.

What does interest rate mean?

The transactions of industries around the world are done through banks in which interest rate plays a very important role. Interest rate means that the borrower is obliged to pay interest to the lender after a certain period of time. It is usually expressed in percent.

Rising interest rates on loans given by banks have a negative impact on the economy, so no country likes to raise interest rates. The basic interest rate in Pakistan at present is very high in the current global economic situation. Business is being badly affected due to high-interest rates, which is why there is no business in Pakistan that is able to make a profit of more than 10%.

Decrease in investment

Due to rising interest rates, people prefer to make a profit by investing in banks rather than investing in the capital market, which slows down economic activities as savings tend to increase, and the tendency to borrow due to rising interest rates. Decreases, exports decrease, and imports increase.

New investments stop, installments become more expensive, home or car purchases decrease in installments, unemployment rises, bank deposits for savings increase, then circulation notes decrease reducing inflation.

Traders’ concerns

Traders have expressed concern over the rise in interest rates by the SBP, saying that in the current scenario, the rise in interest rates would bring another storm of inflation. Due to gas and other tariffs, manufacturers are facing difficulties in meeting external orders.

In such circumstances, the State Bank of Pakistan has increased the interest rate by two and a half percent, affecting the business activities of millions of people associated with the industry and agriculture sector. After this increase in interest rates, neither inflation will be reduced nor will it help in reducing the falling value of the rupee.

Not only will there be a failure to control the growing current account deficit but also the balance of payments will not be maintained.

Loss of rising interest rates

Debt installments on the government increase which causes the governments to increase taxes on the people. This is the reason why the rich get richer due to higher interest on savings while the poor get poorer due to increasing burden.

Pakistan’s economic situation is very difficult at the moment, so the government is trying to run the system with the help of external loans but artificially the government can support the economy for a while but its lasting benefits will not be found in any case but the chances of loss will increase.

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