Economists, industrialists and business community     sharply reacted on the announcement of hike in     benchmark interest rate of 12 percent. Renowned     economist Dr. Shahid Hassan has said that the SBP     has been enhancing the discount rate since April 2005 but has failed to contain inflation. This increase of 100 bps will also meet the same fate. The government and the SBP have to clearly understand that the era of low oil prices and low food grain prices will never come back. We will never be seeing the prices of 2005. That the macro economic indicators of Pakistan have deteriorated so much that by taking routine and the reformatory measures the economic indicators cannot be improved nor sustainable economic growth can be achieved with low rate of inflation. One of the serious problems that Governor State Bank pointed out is the large trade deficit, the current account deficit, falls in the foreign reserves and accelerated pace of depreciation of rupee. He said the State Bank's policy and actions have also significantly contributed to this negative trend. For example, the rise in total imports of Pakistan from the year 2003 to 2008 is about 26 billion dollars whereas increase in the imports of oil during this period is only about 8.5 billion dollars. This is more than obvious that due to the policies of SBP for allowing the banks under consumer financing schemes for import of car, the air conditioners, mobile phones and other luxury items. The import bill has gone up. It is estimated that mobile phones of over 5 billion dollars have been imported during this period. He said it was incumbent of SBP to ban consumer finance scheme for imported items when oil prices were increased in the international market. It is very unfortunate that due to ignoring agriculture sector we had to import wheat in huge quantity when the prices of the commodity went up in the international market, he added. "Had we paid attention to agriculture sector during last 9 years, we would have earned huge foreign exchange from the export of wheat and the rise in prices of wheat in the international market would have been a blessing for Pakistan," he maintained. It is a prudent decision of State Bank to impose 35 percent margin on L/Cs but machinery and raw material for machinery should have been exempted from this condition as imposing of margin would enhance cost of production and also enhance inflation and would hamper exports, Dr. Hassan argued. He said in view of high inflation the payment of 5 percent per annum return to depositors as announced the SBP is too low and amounts to exploitation of depositors as the banks would be paying about 6 percent per annum negative returns to depositors. He said State Bank should have asked the banks to offer a rate of about 10 percent to the saving bank account holder keeping in view 3.5 percent instead of existing 7 percent and charge from borrowers 13 percent per annum. By allowing banks to maintain spread of 7 percent, SBP is passing on benefits to rich and powerful owners of the banks whose return on equity is over 30 percent and 55 percent of deposits are with banks with major share holdings of the foreigners, he said. In any case over 15 million saving account holders have opened the accounts on profit and loss sharing basis but the rate of returns have been reduced from 6.5 percent in 2000 when the total pre tax profit of all banks was only Rs7 billion but the profit in 2000 rose to as higher about Rs100 billion. This is violation of agreement. Industrials Dr. Mirza Ikhtiar Baig has termed the increase in discount rates as a last nail in coffin box as it can negatively hurt the sector as the likely increase in exchange rate along with the increase in cost of borrowing and would hamper exports. The discount rate hike would increase KIBOR by 2 percent. He said food prices couldn't be controlled through such steps. He said that at an urgent meeting was held in Islamabad on Friday with Federal Finance Minister, Governor State Bank, secretary finance to look into concern shown by the industrialists. He said he presented FPCCI in the meeting, which decided to withdraw 35 percent margin on L/C on import of raw materials. Iqbal Ebrahim, Chairman, All Pakistan Textile Mills Association (APTMA) has shown serious concern on the announcement of the decision of the Governor State Bank of Pakistan to increase discount rate by 1.5 percent and levy of 35 percent Margin requirement on opening of L/C would lead to closure of Industrial Sector specially the export oriented industries. Chairman APTMA said that the decision of SBP Governor to increase discount rate by 1.5 percent and imposition of 35 percent margin requirement on opening of L/C would put negative impact on all over economy. He was of the view that from now on no L/C will be opened because the industry has to pay mark-up on the margin, which will also increase the cost of production. He said that we were asking for relief in high interest rate for the textile industry on the other hand we are shocked by the increase in interest rate. Iqbal Ebrahim further said that the manufacturing sector is already facing cash flow problem due to high cost of all inputs in addition to several other problems such as shortage of electricity and gas, raw material crisis, inflation and high cost of doing business, now the requirement of 35 percent margin on import will result in severe liquidity crunch which will increase the probability of default in payment of their liabilities. Rise in discount rate will increase the burden on the industry, as this will have direct relation with increase in cost of raw material. Chairman APTMA was of the view that the textile industry, which is export-oriented industry, should be exempted from the requirement of L/C Margin because the cost-push factor has already made our industry uncompetitive. He suggested that all industrial raw materials like cotton, machines, machine spares, dyes and chemicals etc. should be exempted from this requirement as these are required to earn valued foreign exchange after value addition. He emphasized that the textile industry is not the cause of inflation in the country infact textile sector is the largest employer in the manufacturing sector and earns much-needed foreign exchange for the country. He said that the question is why the government wants to kill the goose that lays the golden egg. Analysts are of the view that the increase in CRR/SLR would reduce the liquidity from the system by approximately Rs60 billion. In addition, this would encourage the reluctant banks to invest in govt, securities as the banks have retired Rs131 billion during 1st Quarter of CY08. Raising margin requirement for imports would reduce pressure on the exchange rate, as it would discourage speculation. However, 38 percent of our total import bill is contributed by food and oil. Therefore, pressure on the currency would persist in the future. The hike in discount rate would have significant impact on money market rates as the already-rising KIBOR, call money rates and PIB yields would further move up. The TFCs are also expected to witness widening of credit spreads due to the liquidity crunch. The objective of the SBP was to curtail consumption, which in our view is not very likely to be achieved through this measure. However, as the SBP had to deliver on its mandate of price stability, therefore the bank had to act government's persistent reliance on borrowing directly from SBP is the root cause of all problems which exerted pressure on exchange rate as well as inflation, they added.