Businessmen demand 500bps rate cut

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.