KARACHI: The Pakistan Business Council (PBC) has stated that a reduction of about 200 basis points in the policy rate on Dec 16 is feasible, with further cuts expected in early 2025 if inflation remains controlled.
“This cut will bring the policy rate close to the 3+ months KIBOR rate, which is about 12.5 percent at present,” said PBC Chief Executive Ehsan Malik. He suggested that the Monetary Policy Committee (MPC) of the State Bank should reduce the real positive policy rate in line with its forward-looking inflation estimate.
A gradual reduction would reduce risk and create fiscal space to ease the burden on overtaxed sectors, including salaried employees.
“This would also help create jobs, generate demand, and raise tax revenue. Additionally, it would enable the export sector to price its credit more competitively than other countries,” he added.
Ehsan Malik noted that Pakistan is showing signs of economic stability, citing previous episodes of stability during the first year of IMF programmes in 2000, 2008, 2013, and 2019. He cautioned against transitioning to growth too quickly, pointing out that previous periods of growth after stability led to external account crises.
The State Bank of Pakistan’s 15 percent policy rate, net of November’s CPI of 4.9 percent, creates a real positive rate of 10.1 percent. From January 2013 to July 2020, Pakistan’s real positive rate remained between 0-5 percent, later turning negative and rebounding to the current 10.1 percent.
He compared the real positive policy rate in Pakistan to other countries, noting that Bangladesh’s policy rate stands at 10 percent, while its inflation rate is 10.87 percent, resulting in a real negative rate of 0.87 percent. Egypt, on the other hand, has a real positive policy rate of 1.25 percent.
Sri Lanka’s real positive rate aligns with Pakistan’s at 10.1 percent, as its inflation rate is recorded at negative 2.1 percent against a policy rate of 8 percent. India’s real positive policy rate is comparatively low at 0.5 percent, with its policy rate at 6.5 percent and inflation at 6 percent.
He also highlighted that India’s foreign exchange reserves currently amount to $657 billion, even after utilizing $48 billion over the last nine months to stabilize the value of the Indian rupee.
Separately, United Business Group (UBG) Patron-in-Chief S.M. Tanveer called for a 500 basis points reduction in the policy rate, following the decline in November’s CPI to 4.9 percent. He stated that further reductions in interest rates would lower bank markup rates to single digits, making loans more accessible and affordable for businesses and consumers, encouraging investment and stimulating economic activity.
