KARACHI: Chairman Businessmen Group Zubair Motiwala and President Karachi Chamber of Commerce & Industry (KCCI) Iftikhar Ahmed Sheikh have advised the State Bank of Pakistan (SBP) to announce a substantial reduction in interest rate by at least 500 basis points to bring the existing interest rate down to 14.5 percent from the existing 19.5 percent in the next monetary policy statement as the inflation continues to descend to reach 9.6 percent in August whereas the Moody’s recently upgraded local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3.
In a joint statement issued, Chairman BMG and President KCCI stated that with inflation dropping to 9.6 percent, which was the lowest in three years, there was a strong justification for a reduction in the policy rate. This decline follows a peak of 38 percent in May 2023, demonstrating that inflationary pressures have eased considerably. The last instance of single-digit inflation was recorded in October 2021 at 9.2 percent, when the policy rate stood at 7.25 percent, hence, we firmly that drastic reduction in policy rate was desperately needed to trigger industrial and economic activities, they added.
Chairman BMG Zubair Motiwala stated that Large-Scale Manufacturing Index (LSMI) growth in FY24 stood at a marginal 0.9 percent, highlighting the adverse impact of prolonged high policy rates, therefore, a reduction in the policy rate would not only provide much-needed relief to the manufacturing sector but also stimulate economic growth. “The private sector’s share of total credit has sharply declined from 29.7 percent in July 2019 to 19.8 percent in July 2024. Lowering the policy rate could encourage borrowing and investment in the private sector, boosting economic activity”, he opined.
He also pointed out that Pakistan’s real interest rate (i.e. policy rate minus inflation) was currently 9.9 percent, which was significantly higher as compared to neighboring countries including India, China and Bangladesh where real interest rate stood at 3.0 percent, 2.9 percent and minus 3.2 percent respectively. “In this scenario, a reduction in the policy rate would certainly help improve Pakistan’s regional competitiveness.”
He further stated that reducing the policy rate by 1 percent could save approximately Rs467 billion in debt servicing costs, providing substantial fiscal relief and reducing the financial burden on the government.
President KCCI Iftikhar Ahmed Sheikh was of the view that significant decline in global commodity prices, including a 23.1 percent reduction in wheat prices, coupled with improved domestic agricultural output, has eased inflationary pressures.
He said that sharp increase in policy rate from 7 percent in August 2021 to 22 percent by May 2023 did not effectively control inflation. This suggests that alternative monetary tools should be considered, and a reduction in the policy rate could help stimulate economic growth. “The government’s share of total credit has risen to 79.3 percent as of July 2024, crowding out the private sector. A reduction in the policy rate could help rebalance credit distribution towards the private sector”, he added.
Keeping in view all the above-mentioned facts, Zubair Motiwala and Iftikhar Sheikh hoped that the State Bank would come up with a substantial reduction of at least 500 basis points in its next monetary policy statement which would be widely welcomed by the business community as it would help in providing the much-needed relief to businesses who were struggling hard for survival due to excessively high cost of doing business.