ICMA welcomes SBP’s policy rate cut as a strategic step towards economic recovery

KARACHI: The Institute of Cost and Management Accountants of Pakistan (ICMA) commends the State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) for its decision to reduce the policy rate by 200 basis points, bringing it to 13 percent, effective December 17, 2024. This bold move reflects a pragmatic approach to economic realities and aligns with investor expectations, following a significant decline in headline inflation to 4.9% year-on-year in November. The reduction in inflation, driven by easing food prices and favorable global commodity trends, signals a turning point in Pakistan’s economic outlook.

ICMA recognizes this policy adjustment as a critical step toward revitalizing the economy. It is anticipated to stimulate growth in the agriculture and industrial sectors, enhance external sector stability, and support sustained inflation management.

In its analysis, ICMA highlights the pivotal role of key inflation indicators in shaping monetary policy:

• Consumer Price Index (CPI): The CPI showed a substantial decline, primarily due to easing food prices and favorable global commodity dynamics, delivering immediate relief to consumers.

• Core Inflation: Despite the reduction in headline inflation, core inflation remains elevated at 9.7%, reflecting structural challenges such as high production costs and supply chain inefficiencies. Addressing these persistent pressures requires strategic, long-term policy reforms.

• Sensitive Price Index (SPI): By monitoring weekly price changes of essential commodities, the SPI provides critical insights into inflation trends affecting lower-income households, ensuring that targeted interventions can be effectively designed.

These indicators collectively empower policymakers to balance short-term relief measures with sustainable economic strategies.

Pakistan’s recent economic performance offers encouraging signs of recovery. Key developments include a third consecutive current account surplus in October, robust remittance inflows, an 8.7% surge in exports, and improved foreign exchange reserves reaching $12 billion. However, fiscal challenges remain, with tax collections falling below targets despite a 23% growth in Federal Board of Revenue (FBR) revenues during July-November FY25.

To further strengthen economic recovery, ICMA offers the following policy recommendations:

• Further Policy Rate Reductions: A gradual reduction in the policy rate to 7-8% by mid-2025 to stimulate investment and reduce the cost of borrowing.

• Monetary-Fiscal Coordi-nation: Enhanced collaboration between fiscal and monetary authorities to stabilize the exchange rate and support inflation management.

• Structural Reforms: Focused efforts to reduce energy costs, streamline supply chains, and address persistent inflationary pressures.

• Targeted Subsidies: Effective price monitoring and subsidies to ensure inflation relief for lower-income households.

ICMA underscores the importance of coupling these measures with SBP’s monetary policy actions to foster a conducive environment for sustainable economic growth. Such steps are essential for improving business confidence, stimulating investment, and promoting long-term economic resilience.

Copyright Business Recorder, 2024