ICMAP Calls for SBP to Reduce Policy Rate to 11%

ICMAP Calls for SBP to Reduce Policy Rate to 11%

The Institute of Cost and Management Accountants of Pakistan (ICMAP) has urged the State Bank of Pakistan (SBP) to lower the key policy rate from the current 13% to 11%, advocating for a strategic reduction of 200 basis points (bps) to reinvigorate economic activity, boost investment, and restore confidence in Pakistan’s economy.

This recommendation comes as the SBP prepares to announce its monetary policy on January 27, 2025.

ICMAP’s Research and Publications Department has raised concerns about the potential risks of maintaining the status quo. Key among these is the threat of an economic slowdown, especially as inflation is projected to drop to 2.9% in January 2025. Without a substantial policy rate cut, the Institute warns that economic recovery could be hindered by reduced activity and stagnation.

A critical factor highlighted by ICMAP is the elevated real interest rate, which was recorded at 8.9% in December 2024. This high rate may deter private sector borrowing, suppressing investment and consumer spending. Coupled with sluggish GDP growth, currently at a mere 0.92%, the outlook appears grim unless corrective action is taken. Declining inflation, while beneficial in some respects, could negatively impact corporate profitability, further dampening economic momentum. Moreover, high borrowing costs and an overvalued real exchange rate risk undermining Pakistan’s export competitiveness in global markets.

The Institute also points to the mounting strain on government finances due to increasing debt servicing costs, which could erode fiscal stability. Persistent tight monetary policy might weaken investor and consumer confidence, delaying the country’s economic recovery. Furthermore, prolonged low growth could exacerbate unemployment and poverty, adding to societal challenges.

While market sentiment anticipates a more conservative rate cut of 100 to 150 bps, ICMAP contends that a bold reduction of 200 bps would be significantly more effective. Such a move would maintain positive real interest rates, stimulate credit demand, and ensure sufficient returns for investors. According to ICMAP’s economic projections, a 200 bps cut could drive GDP growth to around 2% by the second quarter of FY25, with further acceleration expected in subsequent quarters.

ICMAP views this decisive policy action as essential for fostering a resilient and dynamic economy. It strongly urges the SBP to implement this recommendation in its upcoming monetary policy decision to mitigate risks, enhance stability, and set Pakistan on a path to sustainable economic recovery.