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Expected Policy Rate Cut: A Step Toward Economic Revival in Pakistan

policy rate cut 200 bps

KARACHI: In a significant move, the Pakistan Business Council (PBC) has expressed optimism about the expected policy rate cut of 200 basis points (bps) reduction in the policy rate during the upcoming Monetary Policy Committee – MPC meeting on December 16. With inflation showing signs of stability, this cut could be the first of several, paving the way for economic recovery in 2025. Ehsan Malik, PBC’s Chief Executive, highlighted the importance of aligning the policy rate with forward-looking inflation estimates, emphasizing that a balanced approach would mitigate risks while creating fiscal space to support overburdened sectors like salaried employees.

Implication of Expected Rate Cut

  • Policy Rate Reduction to Stimulate Economic Growth: The Pakistan Business Council (PBC) suggests a 200-500 basis points reduction in the policy rate to lower borrowing costs, encourage investment, and boost economic activity, particularly in the industrial and export sectors.
  • Cautious Approach to Maintain Stability: The PBC warns against a rapid rate cut, emphasizing the need for gradual reductions to prevent increased import demand, current account imbalances, and exchange rate pressures while aligning monetary policies with fiscal objectives.

پاکستان بزنس کونسل نے شرح سود میں 200 بیس پوائنٹ کی کمی کی تجویز دی ہے تاکہ اقتصادی بحالی کے لیے مزید بہتر مواقع پیدا کیے جا سکیں۔ شرح سود میں کمی سے کاروبار کے لیے سستے قرضے دستیابی، سرمایہ کاری میں اضافہ، اور ملکی معیشت کو ترقی کے بہتر مواقع فراہم ہوں گے۔ پاکستان بزنس کونسل کے مطابق درآمدات کی طلب میں غیر ضروری اضافہ اور کرنٹ اکاؤنٹ پر غیر ضروری دباؤ کو بھی کنڑول کرنے کی ضرورت ہے ۔

مختلف بزنس گروپس نے بھی زیادہ شرح سود میں مزید کمی کا مطالبہ کیا ہے تاکہ معیشت کو ترقی کی راہ پر گامزن کیا جا سکے۔ ہمسایہ ممالک کی شرح سود کا تقابلی جائزہ کے مطابق پاکستان میں موجودہ شرح سود خطے کے دیگر ممالک کے مقابلے میں بہت زیادہ ہے۔ حکومت کو معیشت کو مستحکم کرنے کے لیے متوازن پالیسیوں اور شرح سود میں بتدریج کمی لانا ہو گی۔

PBC Suggests Gradual Approach for Policy Rate Cut

PBC’s analysis suggests that a 200bps cut would bring the policy rate closer to the current 3+ months Karachi Interbank Offered Rate (KIBOR), which stands at 12.5%. Ehsan Malik advocated for a cautious reduction in the real positive policy rate, currently at 10.1%, compared to historical rates of 0-5% from 2013 to 2020. He warned against abrupt shifts, citing the risk of triggering an external account crisis—a recurring issue following economic booms in Pakistan. Malik also stressed the need for monetary and fiscal policy alignment to prevent potential shocks to the economy, such as those caused by unrestricted imports and exchange rate volatility under International Monetary Fund (IMF) guidelines.

Comparison with Neighboring Countries

When compared to neighboring economies, Pakistan’s real positive policy rate of 10.1% stands out. For instance, Bangladesh operates with a negative rate of 0.87%, while Egypt maintains a modest 1.25% positive rate. India, with its vast foreign reserves of $657 billion, keeps a real positive rate of just 0.5%. Malik noted that the disparity highlights the pressing need for Pakistan to adopt a more competitive monetary policy, particularly to benefit its export sector, which struggles to price credit affordably.

Diverging Perspectives on the Rate Cut By Business Community

While the PBC calls for caution, other business leaders have pushed for deeper cuts to spur economic growth. The United Business Group’s Patron-in-Chief, S.M. Tanveer, has urged a 500bps reduction in light of November’s Consumer Price Index (CPI) inflation dropping to 4.9%. He argued that further reductions would lower bank markup rates, making credit more accessible for businesses and consumers, thereby boosting investment and stimulating economic activity.

Similarly, Yakoob H. Karim, President of the Hub Chamber of Commerce and Industry, welcomed a recent 250bps cut but deemed it insufficient. With inflation hovering at 7%, he called for more aggressive rate reductions to incentivize trade and industrial expansion. According to Karim, Pakistan’s high interest rates discourage investment and stifle economic growth. He urged the government to create a business-friendly environment that fosters employment opportunities and revitalizes industrial sectors.

Balancing Growth and Economic Stability

While a policy rate cut could unlock several economic benefits—such as job creation, demand generation, and competitive export pricing—experts caution against underestimating external risks. Malik highlighted the ongoing tensions in the Middle East, which could disrupt the favorable fuel prices that have supported Pakistan’s economy. Additionally, he pointed out that tax revenue shortfalls due to demand compression signal a deeper structural issue that cannot be resolved through rate cuts alone.

The PBC also noted that the MPC has other tools at its disposal, such as adjusting cash reserves and consumer loan limits, to manage economic challenges without over-reliance on rate reductions.

The Path Forward for Economic Stability

Pakistan’s policymakers face a delicate balancing act. On the one hand, businesses demand swift action to lower borrowing costs and revitalize economic activity. On the other, a cautious approach is necessary to prevent a resurgence of external account vulnerabilities. With the MPC’s decision on December 16 carrying significant implications, all eyes remain on the State Bank of Pakistan as it navigates these complex challenges.

Ultimately, while reducing the policy rate appears to be a step in the right direction, its success will depend on how effectively it is complemented by broader fiscal and structural reforms aimed at sustainable economic growth.

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