KARACHI: Chairman Policy Research Advocacy Council of Karachi Chamber of Commerce & Industry (PRAC-KCCI) Mohammad Younus Dagha, while referring to the State Bank of Pakistan’s decision to reduce the policy rate from 22 percent to 19.5 percent in its last two consecutive Monetary Policy Committee meetings, urged the Central Bank to maintain a positive real interest rate but with a lower margin.
Underscoring the need to bring down the policy rate by 200 basis points to 17.5 percent, Chairman PRAC-KCCI said that even after the proposed reduction, the real interest rate will remain positive within the range of 2.4 to 3.4 percent as per IMF’s requirement. “The government’s target of 3.6 percent real GDP growth is achievable only if the real interest rate remains below this projected GDP growth rate, thereby ensuring sustainable debt levels”, he said, adding that the budgetary measures for FY25 were expected to increase inflationary pressures by 3 to 4 percent taking inflation to around 15 percent.
Younus Dagha was of the opinion that a reduction in policy rate would provide crucial relief to businesses and stimulate economic growth without exacerbating real sector strains. “Additionally, it is recommended that the SBP focus on core inflation, excluding volatile elements such as energy and food prices, for a more stable and accurate assessment of economic trends.”
He also noted that currently, the government’s credit accounts for 78.5 percent of total credit, a stark contrast to the private sector’s share which has dwindled to 20.35 percent as of June 2024, compared to nearly 30 percent in June 2019.
Terming the recent reduction in policy rate as a ‘step in the right direction’, Chairman PRAC-KCCI stressed that there was substantial scope for a further cut as recent months clearly indicate a significant reduction in inflation, which sharply decreased from a peak of 38 percent in May 2023 to 11.1 percent in July 2024. “Despite this encouraging trend, the policy rate has only been lowered by 250 basis points, a reduction insufficient to catalyze robust economic growth and effectively mitigate debt servicing burdens”, he added.
He elaborated that SBP’s rationale for maintaining high policy rates primarily to control inflation seems inconsistent with the recent decline in price levels, which can be attributed to administrative measures, a stable exchange rate, and an improved supply of agricultural products. “With the Pakistani Rupee appreciating by nearly 9 percent against the US dollar following a decline from its August 2023 exchange rate of $305.5, along with favorable global commodity prices and reduced petrol prices from Rs318.4 per liter in September 2023 to Rs 269.4 per liter in July 2024, the justification for high policy rates appears increasingly tenuous.”
He said that the prolonged high policy rate has severely hampered economic activities, as reflected in the Large-Scale Manufacturing Index (LSMI), which dropped by 12.4 percent from 130.0 in January 2023 to 113.9 in May 2024. “High interest rates, rising energy costs, and weakened demand are the primary culprits behind this decline”, said Younus Dagha, adding that the high policy rate has also strained Pakistan’s fiscal capacity as interest payments posted a 49.4 percent increase from FY23 to FY24, intensifying fiscal challenges.
Copyright Business Recorder, 2024
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