Karachi, October 10, 2024 – The Karachi Chamber of Commerce and Industry (KCCI) has urged the State Bank of Pakistan (SBP) to cut the policy rate by at least 300 basis points in response to falling inflation and to stimulate economic growth.
KCCI President Muhammad Jawed Bilwani and Chairman of the Policy Research & Advisory Council (PRAC) Mohammad Younus Dagha issued a joint statement, calling for a more aggressive reduction in the policy rate at the upcoming Monetary Policy Committee (MPC) meeting.
This recommendation comes as Pakistan’s inflation rate dropped to 6.9% in September 2024, marking the second consecutive month of single-digit inflation following more than two years of high inflationary pressures. Bilwani and Dagha acknowledged the SBP’s efforts to gradually reduce the policy rate from 22% to 17.5% over the last three meetings, but they emphasized that a more substantial cut is now necessary to revive economic activity.
With inflation seemingly under control and commodity prices stabilizing, the KCCI leaders believe that a sharp policy rate cut could relieve the burden on businesses, particularly in the large-scale manufacturing sector. “Lower interest rates would help stimulate growth in large-scale manufacturing, which has been declining for several months due to high borrowing costs and restricted access to credit,” Bilwani stated.
Citing alarming data, Bilwani highlighted that the Large-Scale Manufacturing Index (LSMI) dropped by 19.2% between January and July 2024, reflecting the challenges faced by the private sector. He noted that access to credit remains severely limited due to excessive collateral requirements, with loan collateral in Pakistan averaging 153% of the loan’s value—significantly higher than the borrowed amount.
The private sector credit situation is particularly concerning, as it has fallen to one of the lowest levels among emerging markets. Bilwani pointed out that private sector credit accounts for only 12% of Pakistan’s GDP, compared to 50.1% in India, 50.3% in Türkiye, and 37.6% in Bangladesh. “The widening gap between public and private sector lending is critical, with 79.7% of total credit going to the public sector, effectively crowding out the private sector,” Bilwani said.
He added that the current credit environment could undermine long-term growth, as the reliance on domestic borrowing to finance fiscal deficits has led to a surge in domestic debt servicing costs. During FY24, interest payments on domestic debt increased by 50.4%, from Rs4.8 trillion to Rs7.2 trillion, driven by elevated policy rates.
PRAC Chairman Younus Dagha echoed Bilwani’s concerns, emphasizing that even after three policy rate cuts, Pakistan’s real interest rate remains the highest in the region, standing at 10.6%. In comparison, India’s real interest rate is 2.9%, China’s is 2.8%, and Bangladesh’s is negative at -0.4%. “This puts Pakistan at a significant disadvantage in fostering private sector-led growth,” Dagha argued.
Dagha stressed the need for commercial banks to expand lending to small and medium enterprises (SMEs) and key growth sectors, reducing collateral requirements to promote private sector investment. He pointed to other countries, such as India, Bangladesh, and Vietnam, that have sustained growth with lower interest rates and urged the SBP to adopt a similar approach.
The KCCI and PRAC remain committed to advocating for policies that promote sustainable economic growth, reduce fiscal imbalances, and prioritize private sector development. A substantial reduction in the policy rate, they argue, is essential to unlock the private sector’s potential and drive a robust recovery.