KARACHI: Pakistan Business Council (PBC) has said that a decrease of about 200bps in the policy rate on Dec 16 appears feasible, with more to follow in early 2025, provided inflation remains tame.
“This cut will bring the policy rate close to the 3+ months KIBOR rate, which is about 12.5pc at present,” said PBC chief executive Ehsan Malik on Friday.
He said that the Monetary Policy Committee (MPC) of the State Bank should consider reducing the real positive policy rate in line with its forward-looking inflation rate estimate. A gradual cut will minimise risk and create fiscal space to relieve the pressure on the 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.
He said Pakistan is beginning to see signs of economic stability and experienced four previous episodes of stability in the first year of an IMF programme — in 2000, 2008, 2013, and 2019. Tempting as it is to move to the growth stage, he recalled that every boom after a period of stability in the past has left Pakistan in an external account crisis.
The State Bank of Pakistan’s 15pc policy rate, net of November’s CPI of 4.9pc, is 10.1pc positive. From January 2013 to July 2020, the real positive rate in Pakistan hovered between 0-5pc, before turning negative and beginning to bounce back, reaching 10.1pc positive in November.
While each country under an IMF programme has unique challenges, a 10.1pc real positive rate in Pakistan is significantly higher than the 1.25pc real positive rate in Egypt and 0.87pc real negative in Bangladesh.
Ehsan said Bangladesh’s policy rate is 10pc, with inflation at 10.87pc. Only Sri Lanka’s net positive rate of 10.1pc matches Pakistan’s. Sri Lanka’s November inflation stood at a negative 2.1pc versus a policy rate of 8pc.
On the other hand, India’s real positive policy rate is just 0.5pc, with inflation hovering at 6pc and the policy rate at 6.5pc. However, India has the comfort of $657bn foreign exchange reserves after utilising $48bn to support the value of the Indian rupee over the last nine months, he added.
On the contrary, United Business Group (UBG) Patron-in-Chief S.M. Tanveer has demanded a 500 basis points reduction in the policy rate following a decline in the CPI for November 2024 to 4.9pc.
He said further cuts in interest rates would help bring bank markup rates back to single digits, making loans more accessible and affordable for businesses and consumers alike, encouraging investment, stimulating economic activity and contributing to the nation’s overall prosperity.
Published in Dawn, December 7th, 2024
