Islamabad: The steel industry in Pakistan has requested the State Bank of Pakistan (SBP) to lower interest rates in the upcoming Monetary Policy meeting. The industry urgently warns of potentially severe consequences for the nation’s economy.
The Pakistan Association of Large Steel Producers (PALSP) has addressed a letter to relevant ministries highlighting the vital role played by the steel industry in Pakistan’s economy. The industry employs over 300,000 individuals and supports downstream sectors, influencing 7.5 million jobs across various industries.
However, the industry faces a severe liquidity crunch due to reduced working capital and weakened purchasing power resulting from substantial capital requirements. This situation has led to the closure of numerous small to medium-sized steel mills, causing significant job losses. The high-interest rates, currently standing at 22%, threaten the steel industry’s sustainability, potentially leading to a national unemployment crisis that demands immediate attention from the Government.
Pakistan’s domestic steel industry is rendered uncompetitive by the high-interest rates compared to other countries. For instance, neighboring countries enjoy significantly lower rates, 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.
These high-interest rates make it challenging for the steel industry to access credit from financial institutions, leading to stalled expansions and discouraging steel manufacturers from further investments. Consequently, the once-promising growth of existing industries has come to a standstill.
A recent report by JS Global underscores the need for action, stating that real interest rates have turned positive since September 2023 and are expected to experience a significant expansion with the current Policy Rate at 22%. In the absence of negative CPI surprises, the SBP has an opportunity to initiate monetary easing sooner than anticipated.
PALSP Secretary General Wajid Bukhari emphasizes the urgency of the situation, stating that the government of Pakistan’s debt servicing has surged to PKR 7.6 trillion, consuming the majority of the net income of the Federal Government. These rates are unsustainable, and the SBP must act promptly to create fiscal space for government infrastructure projects, crucial following the recent floods in Pakistan.
Bukhari highlights the broader impact, stating that the government must recognize the gravity of the crisis and implement immediate measures to support businesses and encourage investment in the country. Implementing business-friendly policies is not just about preserving jobs in the steel industry; it is crucial for the overall economic well-being of Pakistan.