The Devastating Impact of High Interest Rates on Pakistan’s Economy!

Pakistan’s economy has been facing a multitude of challenges in recent years, and one issue that has been particularly concerning is the impact of high-interest rates. The State Bank of Pakistan (SBP) has raised interest rates multiple times over the past year i.e. from 7% to 21% just within 2 years. The Monetary Policy Committee of SBP who is responsible to formulate and take decisions regarding monetary policy stance increased intrest rate to 21% on April 4, 2023 to curb inflation and stabilize the economy, but this decision has had far-reaching consequences. From small business owners struggling to obtain loans to consumers facing higher costs of borrowing, the ripple effect of these high rates is being felt across the board. Furthermore, the high interest rates have also made it more difficult for Pakistan to attract foreign investment, potentially hindering economic growth in the long run. In this article, we’ll explore how high interest rates are affecting Pakistan’s economy and what steps can be taken to mitigate the impact.

The impact of high interest rates on Pakistan’s economy

The first and most significant impact of high interest rates is on businesses and consumers. Small businesses are finding it challenging to obtain loans and credit from financial institutions as the cost of borrowing has increased. This has led to a decrease in business investment, which, in turn, has resulted in lower economic growth. Additionally, higher interest rates mean that businesses have to pay more for their loans, which decreases their profits, and as a result, can lead to layoffs and downsizing.

Similarly, consumers are also facing higher costs of borrowing. With increased interest rates, the cost of mortgages, car loans, and credit card interest has gone up. This has led to decreased consumer spending, which is a significant driver of economic growth. Consumers have become hesitant to spend and are focusing more on saving, which has led to a decrease in demand for goods and services. This decrease in demand has resulted in many businesses experiencing lower revenues, which has further amplified the impact of high-interest rates.

Lastly, high-interest rates have also made it more challenging for Pakistan to attract foreign investment. Foreign investors are more likely to invest in countries with lower interest rates as it is cheaper to borrow money, and the cost of capital is lower. With higher interest rates, Pakistan has become less attractive to foreign investors, which can hinder economic growth in the long run.

Effects on businesses and consumers

The effects of high-interest rates on businesses and consumers are far-reaching. For businesses, the increased cost of borrowing has translated into reduced investment. Many small businesses are struggling to obtain loans, and even when they do, the high-interest rates make it challenging to manage their finances. As a result, many businesses have had to lay off employees or downsize their operations, leading to higher unemployment rates and lower economic growth.

For consumers, higher interest rates mean that the cost of borrowing has increased. This has led to decreased consumer spending, which has a significant impact on the economy. Consumers are becoming more hesitant to spend money, which has led to lower demand for goods and services. This decrease in demand has resulted in many businesses experiencing lower revenues, which has further amplified the impact of high-interest rates.

Government policies and actions to address the issue

The government has taken several steps to address the issue of high-interest rates. The government has implemented several policies to reduce the impact of high-interest rates on businesses and consumers. The government has launched several initiatives to provide small businesses with access to credit and loans. The SBP has also launched several programs to promote financial inclusion, which will allow more people to access credit and loans.

The role of inflation and exchange rates

Inflation and exchange rates play a significant role in determining interest rates. Inflation is a measure of the rate at which the general price level of goods and services is increasing, which can lead to higher interest rates. Exchange rates also play a role in determining interest rates as they are a measure of the value of a country’s currency relative to other currencies.In the previous 13 months the Pak Rupee lost more than 68% value against the US Dollar which had a very devastating impact on the economy.

In Pakistan, inflation has been a significant concern. As per official data of government of Pakistan published by the Pakistan Bureau of Statistics, the inflation rate in Pakistan was 34.5 in March 2023.  The government has been working to reduce it but reducing inflation has come at the cost of lower economic growth, as interest rates have been raised to curb inflation. 

Comparison with other countries

Pakistan is not the only country that has faced high-interest rates. Many other countries, including India and Turkey, have also experienced high-interest rates in recent years. However, the impact of high-interest rates on Pakistan’s economy has been more significant due to the country’s fragile economic situation.

Future outlook and predictions

The future outlook for Pakistan’s economy remains uncertain. The government has taken several steps to stabilize the economy, but the impact of high-interest rates on businesses and consumers is still being felt. Furthermore, political instability and security concerns continue to hinder economic growth.

Many experts predict that interest rates will remain high in the short term, which could lead to a further slowdown in economic growth. However, there is hope that the government’s efforts to stabilize the economy will lead to lower interest rates and increased economic growth in the long run.

Advice for businesses and individuals

Businesses and individuals can take several steps to mitigate the impact of high-interest rates. For businesses, it is essential to focus on reducing costs and increasing productivity. This can help offset the impact of high-interest rates on profits. Additionally, businesses should explore alternative sources of funding, such as equity financing, to reduce their reliance on loans.

For individuals, it is essential to focus on reducing debt and increasing savings. With higher interest rates, the cost of borrowing has increased, making it more important to manage debt effectively. Additionally, individuals should explore alternative investments, such as stocks and bonds, to increase their returns.

Conclusion and final thoughts

High-interest rates have had a significant impact on Pakistan’s economy, with businesses and consumers feeling the effects. The government has taken several steps to address the issue, but the impact of high-interest rates is still being felt. In the short term, businesses and individuals can take several steps to mitigate the impact of high-interest rates. However, in the long run, it will be essential for the government to stabilize the economy and reduce inflation to lower interest rates and promote economic growth.

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Usman Rasheed & Co Chartered Accountants is a leading financial advisory and audit firm in Pakistan, having offices in Islamabad, Quetta, Lahore, Karachi, Peshawar & Gilgit. The firm is providing Audit, Tax, Corporate, Financial, Business, Legal & Secretarial Advisory services and other related assistance to local and foreign private, public and other organizations working in Pakistan

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