ASSIGNMENT #01

NAME: AMMARA NAWAZ

ROLL NO # 03

COURSE TITLE: INTERNATIONAL FINANCIAL MANAGEMENT

COURSE CODE:FIN-5053

CLASS: MBA-5A

SEMESTER: SPRING-2020

SUBMITTED TO: PROFESSOR M. MUZAMMAL MURTAZA

DATE: 22-04-2020

DEPARTMENT OF BUSINESS ADMINISTRATION & ECONOMICS

UNIVERSITY OF CENTRAL PUNJAB

FAISALABABAD

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 Table of contents

Sr.No Contents Page. No

1 Impact of recent SBP interest rate decision over Pakistan 03
economy:
2 SBP cuts key interest rate by 2 percent 03
3 Overview 03
4 Investor point of views 04
5 Creditor point of view 05
6 Borrower point of view 06

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Impact of recent SBP interest rate decision over Pakistan economy:

SBP cuts key interest rate by 2 percent:

The new rate has come down from 11 percent to 9 percent. The interest rate declined by 4.25
percent during one month alone. The interest rate has been reduced keeping in view the
coronavirus situation in the country.

The State Bank of Pakistan (SBP) on Thursday cut its key interest rate by two percent. The new
rate has come down from 11 percent to 9 percent. The State Bank's Monetary Policy Committee
announced in a statement their decision to to cut the policy rate by a further 200 basis points to 9
percent. This reduces forward looking real interest rates to around zero, which is about the
middle of the range across most emerging markets. The interest rate has been reduced keeping in
view the coronavirus situation in the country. The interest rate declined by 4.25 percent during
one month. Earlier, the SBP announced that it will provide loans to health facilities on 3%
markup to counter coronavirus outbreak. The SBP declared that inflation rate will come down in
the coming months while the prices of petroleum products will also decrease. Local businesses
and exporters have lately been protesting at high borrowing costs, which they said was harming
investment. In January, the SBP  left the interest rate unchanged at 13.25 percent. The SBP
announces a target rate every two months, which serves as the benchmark interest rate for
overnight funds in the interbank market. It is one of the tools the central bank uses to ensure
price stability in the economy.

Evidences determine that the mounting inflation is not caused by excessive demand but has been
caused by the supply side factor, owing to exorbitant upward movement in electricity, gas and
transportation costs, increase in the prices of oil in international market, rapid increase in tax
rate, and exchange rate devaluation.

Current wheat and sugar crises will accelerate the expected food inflation. It is obvious that non-
food inflation is a bit lower than food inflation in Pakistan, but an increasing trend has been
observed in non-food inflation too. High inflation rate has increased the hardships of poor people
and also eroded their purchasing power.

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Investor point of views:

Investors began to move more and more money out of things like commodities and shares in
companies, and into the relative safety of government bonds. What comforted them was the idea
that the virus was a problem contained in Pakistan. The day that illusion burst – the day that
investors realised that Covid-19 was becoming a global pandemic – was Monday 24 February.. It
was the first place in the west to do so.

 The slow growth of the industrial sector has increased the unemployment, which has
suppressed the purchasing power of the people.
 The most important aspect is that decrease in investment in either sector cuts down
government tax revenues obtained from direct and indirect sources such as income tax,
sales tax and expropriate tax.
 For the time being, hot money inflows have increased in Pakistan due to the low interest
rate. That has a definite impact on foreign reserves as the incumbent government has
faced the severe problem of lack of accumulation of foreign reserves.
 Shows that the confidence of foreign investors has been restored to make investments in
Pakistan owing to reduction of balance of payment deficit and extended stability in the
current exchange rate.
 Bond prices move inversely with interest rates. Therefore, a high nominal interest rate
leads to increase in investment in treasury bills by foreign investors.
 In the current situation of the economy, the SBP should decrease the interest rate and
bring it to the moderate level, around five to seven percent to increase private and public
investment to boost economic growth and development.
 There is a dire need to ease the business environment for the revival of economic
activities. The SBP should consider the core inflation rather than headline inflation while
making its policy rate decisions.

Creditors Point of views

Creditor is an entity that extends credit by giving another entity permission to borrow money
intended to be repaid in the future. A business who provides supplies or services to a company or

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an individual and does not demand payment immediately is also considered a creditor, based on
the fact that the client owes the business money for services already rendered

 In the current situation the major impact of creditors’ to provide the credit financial
institutions prefer to provide credit in financial markets outside their own country
because they want to diversify their credit so that they are not dependent on single
country’s economic conditions.
 Furthermore, they can earn more in foreign financial markets that the level of interest rate
is high.
 A higher-valued currency makes a country's imports less expensive and its exports more
expensive in foreign markets.
 The financial institutions will have lower risk to face country default on credit if the
country’s economic conditions are strong.

Borrower point of view:

In the current situation of Coronavirusn the major impact of Borrowers borrow in foreign
markets to capitalize the low interest rate which means that Lower interest rates make it cheaper
to borrow. This tends to encourage spending and investment. This leads to higher aggregate
demand and economic growth.

lower interest rates will impact following situation :

 Lower interest rates give a smaller return from saving. This lower incentive to save will
encourage consumers to spend rather than hold onto money.

 It will encourage consumers and firms to take out loans to finance greater spending and
investment.

 Interest rates will reduce the monthly cost of mortgage repayments. This will leave
householders with more disposable income and should cause a rise in consumer
spending.

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 Lower interest rates make it more attractive to buy assets and futher if economy condition
is better in few months all these company sell out these assets and gain a high profit or
increase wealth.

 Currency depreciation is a fall in the value of a currency in a floating exchange

rate system. Currency depreciation can occur due to factors such as economic
fundamentals, interest rate differentials, political instability or risk aversion among
borrowers.