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State Bank slashes discount rate to 7.5 percent: 5th cut in 15 months

KARACHI (November 17 2002) : The State Bank of Pakistan has slashed the discount rate by 1.5 percent, from 9 percent to 7.5 percent per annum.

Banks and money experts said that it was a major cut in the discount rate to bring down the interest rate to single digit, but would greatly hurt the profitability of the banks.

“This big slash will certainly have impact upon the interest rates and a minimum decline of 3 percent in interest rates can be expected,” said the treasurer of a leading bank.

“It has been decided to further reduce the minimum rate of return to be paid by recipients of financing facilities from State Bank for meeting temporary liquidity shortages and SBP-3 day Repo facility.

“Accordingly, with effect from 18 November 2002, the minimum rate of return to be paid by recipients of financing facilities from State Bank for meeting temporary liquidity shortages and SBP 3-day Repo facility against the government of Pakistan Market Treasury Bills and Federal/Pakistan investment Bonds has been reduced from 9 percent to 7.5 percent on annual basis,” said the circular issued by the State Bank on Saturday.

The new discount rate, 7.5 percent, is almost half of what it was 15 months back. The discount rate was 14 percent in July, 2001, and this is the fifth cut since then.

The last cut in the discount rate was made in January, 2002 when the rate was brought down from 10 percent to 9 percent per annum.

“The move is to bring the interest rate on single digit so that the private sector could be accelerated to pick up more money and increase the investment,” commented an analyst.

Last year, the private sector borrowing was much lower than the target and higher interest was one of the main reasons. The Finance Minister had been talking about further cut of 2 percent in interest rate.

Bankers said that the impact of 1.5 percent cut in the discount rate would bring down interest rate at least by 3 percent.

However, bankers found it difficult to face the situation. The depositors would be discouraged as the banks would reduce the return on the deposits. Currently, 9 to 10 percent returns are being paid to the depositors and it would be slashed to 7 or 8 percent, they said.

“If the inflation is 4 percent, the depositors will get 3 to 4 percent which is highly disappointing for them,” said a banker.

He said that the banks would find it difficult to generate revenue and it would certainly have impact upon their income as the margin of profit will reduce.

There has been general complaint that banks did not pass on the benefit of the cut in the discount rates to the borrowers and the interest rate remained high, while on the other hand the return on deposits rates was coming down.

The State Bank has been critical about the high cost of mediation, advising the banks to reduce their administrative costs and bring the interest rate down.

The lending rates affected the private sector borrowing, which remained at Rs 30 billion against the target of about Rs 99 billion in the fiscal year ended June 30, 2002.

“We can hope that lending rates would be attractive to increase the investment and that will improve growth of the economy,” said an industrialist.

In a seminar held last month, Dr Ikhtiar Baig, a well-know textile miller, had complained in the presence of Dr Ishrat Husain, Governor State Bank, that Habib Bank was still charging 18 percent mark-up from its regular account holders.

Economists said that through the cut in the discount rate, government's expenditure would decline as it would have to pay less money on its borrowing. However, there is a strong possibility of another big slash in the rates of National Saving Schemes return but experts said that the reduced rates might be introduced from January next year.

They also see a cut in the coupon rate on government bonds.

“One thing is clear, that treasury bills rate would definitely come down and the six months rate, which is 6.37 percent, would be around 5 percent,” said an analyst at a leading brokerage house.

Bankers said that the refinance rates would also come down. The exporters get cheaper money under the export refinance scheme for which the State Bank provides money at 6.5 percent and banks are allowed to get maximum spread of 1.5 percent.

The cut in the discount rate came after discussions with IMF by Dr Ishrat Hussain, Governor SBP.

Finance Minster Shaukat Aziz cheering the decision talking to Business Recorder said, “This cut in discount rate would have a favourable impact on further reducing the cost of borrowing money for private sector and the government both”.

It would have positive effect on the investment climate where the investors would have to pay lesser costs of capital. The higher cost of production would be reduced.

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