Pakistan’s high interest rate of 13.25% is unlikely to be changed anytime soon according to analysts in the country. Monetary policy, which involves the government’s manipulation of the interest rate, has been the favoured tool by government officials in dealing with Pakistan’s economic woes since 2018. This includes high inflation, weak export growth, and increasing levels of national debt.
Pakistan’s inflation rate for January 2020 increased to 8.2%. With high interest rates, the government is hoping that consumer demand will be dampened, putting less pressure on prices, and in turn the Pakistani Rupee will be strengthened as demand increases for domestic currency.
Whilst the high interest rate could prove useful in combatting inflation and stabilising the currency, the extortionate cost of borrowing is proving very detrimental to encouraging private investment. Firms are unwilling to borrow money to expand their businesses when they know they will be gladfully walking into huge amounts of debt.
Despite all of this, the Pakistani economy is still growing and recorded a growth rate of just over 5% in 2019. This highlights the complexity of the country’s economic problems and the difficulties they face in choosing the right course of action.
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term interest rate?
Q2. “With high interest rates, the government is hoping that consumer demand will be dampened” – explain the relationship between high interest rates and consumer demand.
Q3. Analyse the impact that a high rate of interest is likely to have on consumers in Pakistan
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