KARACHI: In an encouraging development for Pakistan’s fiscal landscape, the country’s total interest expenses are projected to decrease by Rs 1.3 trillion in the fiscal year 2025, following a reduction in the key policy rate.
As the inflation is showing signs of stability, the SBP is able to ease monetary policy, which will directly lower the interest payments on public debt. The Monetary Policy Committee (MPC) has reduced interest rate by 7 percent since June 2024.
The Governor State Bank of Pakistan (SBP) Jameel Ahmed, in a briefing to analysts after the MPC meeting, highlighted the impact of the soft monetary policy stance and revealed that the country’s total interest expenses are now expected to be around Rs 8.5 trillion for FY25 down from the initially budgeted Rs 9.8 trillion. “This Rs 1.3 trillion reduction represents a significant saving of approximately 1 percent of GDP, a substantial relief to the country’s finances at a time of ongoing fiscal challenges,” said Muhammad Suhail CEO Topline.
He said falling interest rate and timely debt profiling will help the government to contain the fiscal deficit in FY25.
“As the SBP Governor also pointed out, the decline in policy interest rates as a result of softening inflation numbers, is expected to result in significant decline in total interest expense for the government in FY25,” said Khurram Schehzad an analyst.
He said reduction in interest rate and timely use of surplus funds for debt profiling is resulting in better fiscal management, which in turn will help in containing the fiscal deficit in FY25.
The lower interest expense stems from a recent dip in policy rates, driven by moderating inflation, as well as more effective debt profiling.
Analyst said this reduction in debt-servicing costs will enable the government to reallocate funds more efficiently while keeping the deficit within manageable bounds.
Rising interest costs had posed a major challenge to fiscal policy, crowding out funding for developmental spending and welfare programs. The newfound savings of Rs 1.3 trillion may help mitigate this burden, allowing for better fiscal planning and potentially boosting economic growth.
Copyright Business Recorder, 2024