Good news related to the economy is rare anywhere in the world in these times of the coronavirus pandemic. But Pakistan has had a couple of them in a quick succession. In what must have come as a pleasant surprise for the business community in the country, the SBP cut its interest rate by 200 basis points on Thursday, bringing it down to 9%. This is the third time in nearly a month that the SBP has reduced its benchmark interest rate. On March 17, the central bank had reduced the rate by 75 basis points, to 12.5%. Exactly a week later, on March 24, the bank slashed it again, by 150 basis points, to 11%. The business community had long been calling for the interest rate to be brought down to a single digit. However, the central bank — mainly in pursuit of the hot money — had maintained the key rate at 13.25% between July 15, 2009 and March 17, 2020.
Better late than never, the cut in the policy rate — by 4.25% in some 30 days — will help the country’s sinking economy mainly in two ways. First, it will reduce the cost of debt servicing by an estimated $9 billion. This will bring down the budget deficit and create the much-needed fiscal space for the government, facilitating it to better manage its relief packages for the people locked down inside their homes due to the mushrooming virus. Second, the policy rate cut will reduce the cost of working capital, helping the businessmen and traders with the liquidity crunch and enabling them to expand their businesses and retain their employees.
The SBP decision to cut the policy rate may have been helped by the Wednesday’s announcement from the G20 bloc whereby Pakistan has been included in the group of countries eligible for debt relief on all principal and interest payments to official bilateral creditors. The postponement of debt repayment — for the period between May 1 and Dec 1, 2020 — will help ease pressure on the central bank’s forex reserves. Simultaneously, Pakistan has also secured an additional $1.39 billion loan under the IMF’s Rapid Financing Instrument.
All this is indeed a significant relief for Pakistan whose economic growth rate is forecast to fall in the negative zone due to the prevailing pandemic.
Published in The Express Tribune, April 18th, 2020.
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