Pakistan cuts interest rates and releases corona-virus economic package

State Bank of Pakistan (SBP) on 17 March announced three measures to support the economy and public health in response to the challenges posed by the spread of COVID-19. It reduces the interest rates and has enabled a special package for industry, including cement plants, as well as measures to meet the challenges of the corona-virus pandemic.

First measure
According to an official statement of SBP, it has cut policy rate by 75 basis points to 12.50 per cent but below as per market expectation. The decision reflected the central bank’s view that the outlook for inflation has improved in light of the recent deceleration in domestic food prices, the significant decline in consumer price expectations, the sharp fall in global oil prices and a slowdown in external and domestic demand due to COVID-19.

Second measure
The SBP announced a ‘Temporary Economic Refinance Facility (TERF)’ to stimulate new investment in the manufacturing sector. Under this scheme, the SBP will refinance banks to provide financing at a maximum end-user rate of seven per cent for 10 years for setting up of new industrial units. The total size of the scheme is PKR100bn, with a maximum loan size per project of PKR5bn. It can be accessed by all manufacturing industries including the cement industry, with the exception of the power sector, where an SBP refinance facility for renewable energy projects already exists.

Third measure
The SBP also announced a ‘Refinance Facility for Combating COVID-19 (RFCC)’ to support hospitals and medical centres in combating the spread of COVID-19. Under this scheme, the SBP will refinance banks to provide financing at a maximum end-user rate of three per cent for five years for the purchase of equipment to detect, contain and treat the coronavirus.

While commenting on SBP relief package, a research house stated that reduction in interest rates estimated to bode ill for the banking universe but it is likely to result in lower financial burden for the companies with leveraged balance sheets.