Karachi, September 12, 2024 – The business community in Pakistan has voiced its disappointment over the State Bank of Pakistan’s (SBP) decision to cut the key policy rate by 2%, terming it insufficient given the current economic conditions.
On Thursday, the SBP announced a 200 basis point (bps) reduction, bringing the interest rate down to 17.5%, a move that was met with widespread criticism from industry leaders.
Atif Ikram Sheikh, President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), expressed the frustrations of the business, industry, and trade community, stating that the rate cut came too late and was not enough to address the existing challenges. “While we appreciate the reduction, it is too little, too late considering the domestic and international economic data,” he said.
Core Inflation Remains a Concern
Sheikh pointed out that Pakistan’s core inflation stood at 9.6% in August 2024, according to data from the Pakistan Bureau of Statistics (PBS). Despite the 2% reduction, the real interest rate still remains significantly high, at over 790 basis points above core inflation. “This is anti-business and anti-growth,” Sheikh remarked, stressing that the high interest rate continues to hurt the business community.
He further explained that core inflation is expected to drop to around 8% in September, and with international oil prices at a three-year low of under $70 per barrel, the SBP had room to announce a more substantial rate cut. “The authorities had everything they needed to justify a significant reduction, but they chose to stick to a contractionary monetary policy that is counterproductive,” Sheikh added.
Industry Challenges and Competitiveness
Sheikh emphasized that the cost of doing business in Pakistan is far higher than in competing countries. “Access to finance remains a major hurdle for businesses,” he said, adding that the declining trend in inflation and global oil prices presented an opportunity to support industry and exports. The FPCCI has called for the interest rate to be slashed to 12% immediately, to help Pakistani exporters compete in regional and international markets.
In addition to lowering the interest rate, Sheikh urged the government to follow through on its promises to rationalize electricity tariffs for industries and renegotiate power purchase agreements (PPAs) with independent power producers (IPPs) to ease the financial burden on businesses.
Call for Greater Transparency
The FPCCI also raised concerns about the lack of transparency in economic policymaking. Sheikh questioned the government’s approach and urged it to provide clarity on two key issues: the measures being taken to secure a new International Monetary Fund (IMF) program, and how those steps will impact the cost of doing business. He called for more consultation with the business community before decisions are made.
KCCI: Reduction Not Enough
Altaf A. Ghaffar, Acting President of the Karachi Chamber of Commerce & Industry (KCCI), also expressed disappointment over the modest rate cut. “We were expecting a more substantial reduction of at least 5%, but the SBP has only reduced it by 2%, which is neither enough nor in line with the declining inflation trend,” Ghaffar said.
The KCCI leader added that while the SBP has gradually reduced the interest rate from 22% to 17.5%, more aggressive cuts are needed to stimulate economic growth and ease the financial burden on businesses. “A rate around 7% to 8%, similar to other countries in the region, would have been more appropriate.”
Looking Ahead
The business community has long criticized the SBP’s tight monetary policy for driving up borrowing costs and stifling the manufacturing sector. Ghaffar acknowledged that the recent cuts are a step in the right direction but called for further reductions, at least by 500 basis points in the next review.
Ghaffar noted that inflation has declined due to administrative measures, improved agricultural production, and the stabilization of the rupee, rather than the SBP’s tight monetary stance. He called for the SBP to take more decisive action in its next review to provide relief to businesses struggling with high costs.
The business community remains hopeful for more significant rate cuts in the near future, which they believe are essential for economic recovery and competitiveness on the global stage.
