Karachi, November 1, 2024 – The Karachi Chamber of Commerce and Industry (KCCI) has called on the State Bank of Pakistan (SBP) to implement a substantial interest rate cut of 500 basis points, citing a marked decline in inflation and urging economic revival measures.
KCCI President Muhammad Jawed Bilwani emphasized that with inflation easing to 6.9% in September 2024, it is crucial for the SBP to reduce the policy rate aggressively at the upcoming Monetary Policy Committee (MPC) meeting.
In a statement, Bilwani commended the SBP for its recent steps to reduce the policy rate from 22% to 17.5% over the last three sessions. However, he argued that with inflation dropping to single digits for two consecutive months—a first in over two years—the central bank should adopt a more decisive approach. “With inflationary pressures in check and commodity prices stabilizing, a substantial rate cut of at least 300 to 500 basis points is essential to alleviate the burden on businesses and catalyze economic growth,” Bilwani asserted.
He pointed out that the high interest rates have severely impacted large-scale manufacturing (LSM), which saw a significant decline of 19.2% from January to July 2024. Bilwani noted that back in October 2021, when inflation was 9.2%, the policy rate was 7.2%, and today’s more favorable inflation environment justifies a similar, if not more substantial, reduction to single-digit levels.
Bilwani also underscored the challenges facing the private sector due to the restrictive credit environment. High interest rates, combined with Pakistan’s demanding collateral requirements—averaging 153% of a loan’s value—are squeezing access to private sector financing. As of 2023, private sector credit in Pakistan was a mere 12% of GDP, in stark contrast to India at 50.1%, Türkiye at 50.3%, and Bangladesh at 37.6%.
Highlighting the imbalance in credit allocation, Bilwani noted that 79.7% of total lending is absorbed by the government and public enterprises, crowding out the private sector. By September 2024, private sector credit had fallen to just 20.3% of total lending, down from 29% in early 2022. In comparison, Bangladesh’s public sector consumed only 22.4% of total credit in FY2024, supporting private sector growth.
Bilwani warned that while the SBP’s policies have curbed inflation, the stringent monetary stance has stifled private sector financing and risks hampering long-term growth. The high interest rate environment has also driven up domestic debt servicing costs, with markup payments soaring by 50.4% to Rs7.2 trillion in FY24, primarily due to elevated policy rates. He urged the SBP to recalibrate its approach, emphasizing that a lower rate environment could spur economic vitality, bolster manufacturing, and lay the groundwork for sustained growth.
