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INTEREST RATE & ITS EFFECTS ON THE ECONOMY

By Faisal Bin Hasan Presented to Dr. Yaseen Date 14/11/2010

OBJECTIVE 

To increase our knowledge about Interest
Rates and to find out how it effects the Economy & Economical Development.

PRESENTATION ROAD MAP 
Introduction  Why interest rate change  Latest Interest Rates of Major           
World Economies/Countries Effects of Interest Rate on the Economy Interest Rate of Pakistan (Latest Figures) Interest Rate of SAARC & other Neighboring Countries Comparison with major countries Comparison with SAARC Effects on our Economy Future outlook for Pakistan Economy Effects on our Industries & Industrial Growth Industry most effected Conclusion Thank You

INTRODUCTIONINTRODUCTION-WHAT IS INTEREST RATE 
An interest rate is the rate at which interest is paid by
a borrower for the use of money that they borrow from a lender.. Interests rates are fundamental to a capitalist society Interest rates are normally expressed as a percentage rate over the period of one year.. 

Interest rates targets are also a vital tool of monetary
policy and are taken into account when dealing with variables like, investment, inflation and unemployment..

WHY INTEREST RATES CHANGE..
Reasons for interest rate change  Political short-term gain: Lowering interest rates can give the economy a shortshortgain: shortrun boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates
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Inflationary Expectations: Most economies generally exhibit inflation, meaning a Expectations: given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this. Risks of investment: There is always a risk that the borrower will go bankrupt , investment: abscond, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail. Taxes: Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss

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LATEST INTEREST RATES OF MAJOR WORLD ECONOMIES/COUNTRIES
WORLD INTEREST RATE TABLE MAJOR CENTRAL BANKS OVERVIEW

NEXT MEETING CENTRAL BANK

LAST CHANGE

CURRENT INTEREST RATE

Bank of Canada Bank of England European Central Bank Federal Reserve Swiss National Bank The Reserve Bank of Australia Bank of Japan

Dec 7. 2010 Nov 04 .2010 Nov 04 . 2010 Nov 03 .2010 Dec16 2010 Nov 02 .2010 N/A

Sep 08 2010 Mar 05 2009 May 07. 2009 Dec 16. 2008 Mar 12 2009 May 04. 2010 Dec 19 2008

1% 0.5 % 1% 0.25 % 0.25 % 4.5 % 0.1 %

LATEST INTEREST RATES OF MAJOR WORLD ECONOMIES/COUNTRIES
Country China Current Interest Rate 5.56 % Previous 5.31 % Last Change Oct 19 2010

Republic of Korea

2.25 %

2.00%

July 09 2010

Norway

1.75 %

1.50 %

Dec 16 2009

Sweden

1.00 %

0.75 %

Oct 26 2010

Brazil

10.75 %

10.25 %

July 21 2010

EFFECTS OF INTEREST RATE ON THE ECONOMY 
The economy can be influenced easily by interest rates.
When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back, and the number of purchases of cars and homes goes down. 

The effects of a lower interest rate on the economy are
very beneficial for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. This also bodes well for investors, who perceive less risk in taking out a loan and investing it in something because they would have to pay less back to the bank.. 

Low interest rates are not beneficial for lenders, who are
seeing less of a return on their loan than in times when interest rates are high..

EFFECTS OF INTEREST RATE ON THE ECONOMY
When interest rates increase, though, foreign investment can increase because people outside of the country want a larger return for their investment and they are more likely to get it in a state of high interest rates. This causes more demand for the dollar, driving up its value in the international market.. Although much of it is contained within consumers' perception of the economy and their income, interest rates can drive up consumer spending, investment and the amount of loans people take out of the bank. Or they can increase foreign investment..

EFFECTS OF INTEREST RATE ON THE ECONOMY
IR is said to be an indicator of economy situation and reflection of government policy as well. Therefore fluctuations of IR would have great impact on different areas in the economy and it is crucial to understand what determines it and how it would affect the world.

Out of all, state of economy is the fundamental parameters of IR. when an economy experiences a growth period, IR is decreased to stimulate the amount of money circulating in the market. Conversely, IR is relatively high when a stagnation or recession occurs.

INTEREST RATE OF PAKISTAN(LATEST FIGURES)
‡ Announcing the bi-monthly Monetary Policy Review, bithe central bank said the decision to increase the interest rate to 13.5 per cent was taken at a meeting of the central board of directors of the State Bank held under the chairmanship of Governor Shahid Hafeez Kardar. This is Kardar¶s first policy announcement since he assumed office earlier this month.

‡ The interest rate rise, which effective from September
30, caught analysts off guard, many of whom were expecting the central bank to leave the rate unchanged.

‡ ³The monetary policy stance is formed by the
consideration that the impact of continued inflation is substantial and felt by the entire economy,´

INTEREST RATE OF PAKISTAN(LATEST FIGURES)
‡ The bank hinted that further increases in the policy rate may be
on the cards. ³The next quarter will be crucial in forming an assessment of the effectiveness of government efforts to contain fiscal deficit and its inflationary borrowings from the SBP and the banking system.´

‡ The policy decision manuscript explained that food inflation in
recent months spiked beyond historic levels due to the floods. ³It may take two or three months for food inflation to return to normal levels,´ it added ..

INTEREST RATE OF SAARC & OTHER NEIGHBOURING COUNTRIES 
The interest rate of major SAARC
countries is as follows:  India 6.25%  Sri lanka 15%  Bangladesh 16% 

Other Neighboring Countries:  U.A.E 1.80%  Turkey 6.50%

COMPARISON WITH MAJOR COUNTRIES 
If we try to match Pakistan¶s IR with major countries , there is
no match.. 

Canada, UK, EU, U.S, Switzerland , Japan ,Norway & Sweden
all have IR of below 2 % while Australia & Korea have IR b/w 2 to 5 % , compared with a staggering 13.5 % of Pakistan.. 

Only Brazil is some what near Pakistan with 10.75% IR.. But
it does nt come in the category of most developed countries.. 

Indian Economy is on a high b/c of Continuity of policies ,

COMARISON WITH SAARC & OTHER NEIGHBORING COUNTRIES

better law & order situation & other political strategic reasons. & Telecom sector, so their IR is going down which is lowest in the region..

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Foreign investors are investing big time in India specially in IT 

The IR of Bangladesh rose b/c of low production & exports..  With regards to U.A.E it is an oil exporting country with huge
foreign exchange reserves & also foreign investors tend to invest in U.A.E specially Dubai, so there IR is too low compared with Pakistan..

EFFECTS ON OUR ECONOMY
Pakistan¶s Economy is greatly effected by high interest rate.. With foreign investment shrinking due to poor law & order & political forecast, Local investor is also hesitant to invest at a higher interest rate..

The situation is likely to remain unchanged for the coming couple of years..

Threat of Terrorism & Power Crisis have also made investors skeptical about investment in Pakistan which makes the situation even more gloomy for Pakistan¶s Economy..

EFFECTS ON OUR ECONOMY
A lower interest rate has a positive impact on the Economic & Industrial development b/c the Investor gets loan from the banks at a lower rate & invests in different industries. Inversely a higher interest rate discourages investors from taking loan b/c they have to pay higher rate when they return the loan.. A low interest rate is suitable for the Investors of Pakistan but here the situation is quite opposite.. Due to this reason Investors are shying away from investment in Pakistan & instead investing in U.A.E & other other countries which is affecting Pakistan¶s Economy in a bad manner..

Future outlook for Pakistan Economy with regards to Interest Rate Changes
‡ The out look for Pakistan Economy looks gloomy with Recent
floods increasing food inflation to enormous heights. It is expected that the current figure of 13.5 % interest rate will be difficult to curtail for a couple of years with global recession also effecting Pakistan¶s Economy..

‡ To get it down to a single digit level would require a very
concentrated & sustained financial & fiscal effort in the coming couple of years..

‡ SBP hinted that the interest rate may be increased further
which is a skeptical forecast for the investors..

Future outlook for Pakistan Economy with regards to Interest Rate Changes
‡ Government borrowings have further increased , putting
enormous pressure on the central bank..

‡ The Government needs to cut down its borrowings & decrease
NonNon-Developmental Expenditure with in manageable limits, b/c a substantial part of Government borrowings goes to Non Developmental Expenditure..

‡ The overall outlook for Pakistan¶s ailing economy looks
gloomy & uncertain..

EFFECTS ON OUR INDUSTRIES & INDUSTRIAL GROWTH
Pakistan's two leading companies, as per Forbes Global 2010 ranking for 2009.

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factory output. Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 66% of the merchandise exports and almost 40% of the employed labour force. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing

Global ranking

Company Name

1,284

Oil & Gas Development

1,316

PTCL

EFFECTS ON OUR INDUSTRIES & INDUSTRIAL GROWTH
The government is privatizing large-scale units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries. Industries: textiles (8.5% of the GDP), fertilizer, cement, oil refineries, dairy products,food processing, beverages, construction materials, clothing, paper products, shrimp Industrial production growth rate: 6% Large-scale manufacturing growth rate: 19.9% MAJOR INDUSTRIES Automobile industry Pakistan is an emerging market for automobiles and automotive parts offers immense business and investment opportunities. The total contribution of Auto industry to GDP in 2007 is 2.8% which is likely to increase up to 5.6% in the next 5 years. Auto sector presently, contributes 16% to the manufacturing sector which also is expected to increase 25% in the next 7 years. Car ownership in Pakistan has risen by 40% per annum since 2001.

EFFECTS ON OUR INDUSTRIES & INDUSTRIAL GROWTH
CNG Industry

‡

As of 2009, Pakistan is one of the largest users of CNG (compressed natural gas) in the world. (compressed gas) Presently, more than 2,900 CNG stations are operating in the country in 85 cities and towns, and 1000 more would be set up in the next three years. It has provided employment to over 50,000 people in Pakistan. Cement industry In 1947, Pakistan had inherited four cement plants with a total capacity of 0.5 million tons. Some expansion took place in 1956±66 but could not keep pace with the economic 1956± development and the country had to resort to imports of cement in 1976-77 and continued to 1976do so till 1994-95. The cement sector comprising of 27 plants is contributing above Rs 30 1994billion to the national exchequer in the form of taxes. IT industry Pakistan¶s IT industry has been rising steadily since the last three years. A marked increase in software export figures are an indication of this booming industry¶s potential. The total number of IT companies increased to 1306 and the total estimated size of IT industry is $2.8 billion. In 2007, Pakistan was for the first time featured in the Global Services Location Index by A.T. Kearney and was rated as the 30th best location for offshoring By 2009, Pakistan had improved its rank by ten places to reach 20th. Furthermore, Pakistan has 19 million internet users and 2.3 million facebook users.

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EFFECTS ON OUR INDUSTRIES & INDUSTRIAL GROWTH
Textiles The Textile Industry is dominated by Punjab. 3% of United States imports regarding clothing and other form of textiles is covered by Pakistan. Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to increase at a very decent growth of 16% in 2006. In the period July 2007 ± June 2008, textile exports were US$10.62 billion. Textile exports share in total export of Pakistan has declined from 67% in 1997 to 55% in 2008, as exports of other textile sectors grew. Mining Pakistan is endowed with significant mineral resources and emerging as a very promising area for prospecting/exploration of mineral deposits. Bases on available information, the country's more than 6,00,000 km² of outcrops area demonstrates varied geological potential for metallic and non-metallic mineral deposits. Except oil, gas and nuclear minerals regulated nonat federal level, Minerals are a provincial subject, under the constitution of Islamic Republic of Pakistan. Provincial governments are responsible for development and exploitation of minerals, besides, enforcing regulatory regime. In line with the constitutional framework the federal and provincial governments have jointly set out Pakistan first National Mineral Policy, duly implemented by the provinces, providing appropriate institutional and regulatory framework and equitable and internationally competitive fiscal regime.

INDUSTRY MOST EFFECTED BY INTEREST RATE
The most effected industries are: Automobile Industry Textile Industry Automobile Industry showed highs in the past years but recently it is showing downward trend High interest rate, high inflation and substantial decline in the rupee value have taken a toll on the Automobile industry .. Textile Industry Pakistan used to be the leading exporter of textile but a no. of factors have effected textile industry for instance, power shortage, poor law & order situation, poor production of cotton & interest rate hike etc .. The increasing interest rate caused barrier in opening new manufacturing unit b/c new investment is not coming in the industry..

CONCLUSION 
The interest rate of major developed countries is too low from Pakistan
which indicates there Economic Soundness & fiscal stability. Pakistan¶s ailing economy needs a boost from some where to come out of the current Economic crisis. the country resulting in more unemployment. economy independently. 

If the interest rate is not brought down investment will further squeeze from  Pakistan should try to come out of the IMF program & try to run its  Pakistan must lower its imports & broaden its exports to increase its

reserves , so that we do not have to borrow from IMF all the time. For this purpose we need to strengthen our Agriculture sector so that production increases & surplus can be exported earning vital foreign exchange..

THANK YOU