PBC Predicts 200bps Cut in Policy Rate to Boost Economic Growth
KARACHI: The Pakistan Business Council, a leading business advocacy group in the country, predicts a reduction of 200bps in the policy rate of State Bank of Pakistan as likely on December 16, 2024, which may be followed up by further cuts in the first quarter of 2025.
According to Ehsan Malik, CEO of PBC, this reduction would bring the policy rate closer to the KIBOR of around 12.5%. He urged the SBP’s Monetary Policy Committee (MPC) to consider reducing the real positive policy rate to align with expected inflation rates.
Why a Policy Rate Cut Matters
A rate cut would have several positive effects on Pakistan’s economy:
Job Creation: Lowering interest rates lowers the cost of borrowing and induces business. to spend more, leading to increased spending and therefore hiring.
Demand Increase: With lower costs of borrowing, consumers might increase spending. Business growth depends on that.
Export Competitiveness: The policy rate of Pakistan can be set lower to give more. competitive price of credit than other nations.
Malik also noted that this reduction could provide much-needed relief to overburdened sectors, including salaried employees, and free up fiscal space for the government to tackle other economic challenges.
Signs of Economic Stability
Malic says Pakistan shows early symptoms of a stabilization that have later manifested as growth cycles in this country. Still, he says, this also warned against external account crises arising out of the same. It called for cautious incremental adjustments to avoid a similar event later on.
The current SBP policy rate is 15%. Factoring in the inflation figure (the November Consumer Price Index was at 4.9%), the real positive rate comes to 10.1%. That is way higher than others facing comparable issues under IMF programs. Consider, for example:
Egypt: Real positive rate at 1.25%
Bangladesh: Real negative rate at 0.87%
Sri Lanka: Real positive rate at 10.1%, same as Pakistan
India: Real positive rate at 0.5%
The comparisons show that Pakistan’s current policy rate is pretty high, thus making borrowing money more expensive for businesses and the consumers.
Appeals for Bigger Rate Adjustments
In light of this, PBC shows concurrence with the rate cutting. process but other industry stakeholders are demanding a big slash. S.M. Tanveer, Patron-in-chief UBG. has given this suggestion of 500. basis points cut in policy rates immediately after the fall of inflation to 4.9% in November’2024. Tanveer said that further decreases could only benefit an economy by making credits relatively more easy thereby increasing investment and growth level,
Tanveer believes lowering interest rates to single digits and making credit more widely available for businesses and consumers will contribute toward overall national prosperity.
The PBC’s forecast of a 200bps cut in the policy rate is an encouraging step towards supporting the economy of Pakistan. In addition to cutting borrowing costs, the government can thus help create jobs, build up demand, and strengthen Pakistan’s export sector against its competitors. Gradual rate cuts are advised while, however, business leaders clamor for even bigger cuts to have economic growth and stability sustain for the long haul.
