Karachi, September 4, 2024 – The Karachi Chamber of Commerce and Industry (KCCI) has issued a fervent call for a decisive 500-basis-point reduction in the key policy rate, urging the State Bank of Pakistan (SBP) to slash the rate from the current 19.5% to 14.5% in the forthcoming Monetary Policy Statement (MPS).
In a joint statement, Zubair Motiwala, Chairman of the Businessmen Group (BMG), and Iftikhar Ahmed Sheikh, President of KCCI, emphasized the urgent need for a substantial reduction in the policy rate. They cited the steep decline in inflation, which has plummeted to 9.6% in August, the lowest in three years, as a compelling reason for this policy shift. This drop in inflation comes on the heels of a staggering 38% peak in May 2023, signaling a significant easing of inflationary pressures. Motiwala and Sheikh argue that with inflation now under control, the policy rate should be adjusted accordingly to stimulate economic growth and industrial activity.
Motiwala highlighted the sluggish growth in the Large-Scale Manufacturing Index (LSMI), which posted a meager 0.9% growth in FY24, as evidence of the detrimental impact of prolonged high policy rates. He stressed that lowering the policy rate would provide critical relief to the manufacturing sector, which has been reeling under the burden of elevated borrowing costs. “The private sector’s share of total credit has dramatically declined from 29.7% in July 2019 to just 19.8% in July 2024. A reduction in the policy rate would reinvigorate borrowing and investment, thereby fueling economic activity,” he asserted.
Motiwala also underscored the disparity between Pakistan’s real interest rate (policy rate minus inflation) and that of neighboring countries. Pakistan’s real interest rate currently stands at a staggering 9.9%, far exceeding that of India (3.0%), China (2.9%), and Bangladesh (minus 3.2%). He argued that this high real interest rate is undermining Pakistan’s regional competitiveness, and a reduction in the policy rate would be instrumental in improving it.
Moreover, Motiwala pointed out that even a 1% reduction in the policy rate could save the government approximately Rs. 467 billion in debt servicing costs, providing significant fiscal relief. This would alleviate the financial burden on the government and free up resources for other critical areas of the economy.
Iftikhar Ahmed Sheikh, President of KCCI, echoed these sentiments, noting that the sharp increase in the policy rate from 7% in August 2021 to 22% by May 2023 failed to effectively control inflation. He suggested that alternative monetary tools should be explored, and that a reduction in the policy rate could act as a catalyst for economic growth. Sheikh also pointed to the sharp decline in global commodity prices, such as the 23.1% drop in wheat prices, and improved domestic agricultural output as factors that have eased inflationary pressures.
Sheikh further noted that the government’s share of total credit has surged to 79.3% as of July 2024, effectively crowding out the private sector. A reduction in the policy rate, he argued, could help rebalance credit distribution in favor of the private sector, which is crucial for sustainable economic growth.
In light of these compelling arguments, Motiwala and Sheikh expressed hope that the SBP would heed their call for a significant policy rate cut in the upcoming MPS, which would be warmly welcomed by the business community. Such a move, they asserted, would provide much-needed relief to businesses struggling with the high cost of doing business and would serve as a catalyst for economic revival.
