Businessmen demand 500bps rate cut

Cite descending inflation, Moody's ratings upgrade.

KARACHI:

Businessmen Group Chairman Zubair Motiwala and Karachi Chamber of Commerce and Industry (KCCI) President Iftikhar Ahmed Sheikh have urged the State Bank of Pakistan (SBP) to announce a substantial reduction in interest rate by at least 500 basis points to bring the rate down to 14.5% in the upcoming monetary policy statement.

They cited continuous descending of inflation that reached 9.6% in August whereas Moody's recently upgraded Pakistan's local and foreign currency issuer and senior unsecured debt rating to Caa2 from Caa3.

In a joint statement on Wednesday, the business leaders said with inflation dropping to the lowest level in three years, there was a strong justification for reduction in the policy rate.

This decline follows the peak of 38% inflation in May 2023, demonstrating that inflationary pressures have eased considerably. The last time inflation was seen in single digit was in October 2021, when it rose 9.2%. At that time, the policy rate stood at 7.25%, "hence, a drastic reduction in policy rate was desperately needed to trigger industrial and economic activities".

Motiwala pointed to a marginal growth of 0.9% in the large-scale manufacturing index in FY24, which reflected the adverse impact of high policy rate. "A reduction will only provide much-needed relief to the manufacturing sector but also stimulate economic growth."

He highlighted that private sector's share in total credit had sharply declined from 29.7% in July 2019 to 19.8% in July 2024, adding that a lower policy rate could encourage borrowing and investment in boosting economic activity.

Pakistan's real interest rate – policy rate minus inflation – was currently at 9.9%, which was significantly higher as compared to neighbouring countries including India, China and Bangladesh where the real interest rate remained at 3%, 2.9% and minus 3.2%, respectively.

He emphasised that a 1% cut in policy rate could save approximately Rs467 billion in debt servicing costs, providing substantial relief and easing the burden on the government.