Karachi – March 11, 2025: The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has decided to maintain the policy rate at 12%, effective immediately. ICMA Pakistan, however, believes that a reduction of 100 basis points to 11% was necessary, given the current economic conditions and declining inflation.
Inflation has been on a consistent downward trajectory, declining from 2.4% in January 2025 to 1.5% in February 2025. Despite this, the policy rate remains unchanged at 12%, resulting in an excessively high real interest rate of 10.5%. This is restricting economic activity, as businesses and households face higher borrowing costs. With inflation well below the policy rate, maintaining such a high rate is no longer justified, especially when the central bank’s primary objective is price stability.
Private-sector credit growth has also declined by 8.43% from December 2024 to January 2025, reflecting tighter financial conditions that are dampening investment and economic expansion. A measured reduction in the policy rate would have eased borrowing costs, improved access to credit for businesses and households, and supported economic recovery without posing risks to inflation stability.
Pakistan’s overall economic growth has slowed significantly, with GDP growth dropping from 3.33% to 0.92%. This decline is primarily attributed to a sharp contraction in agricultural growth, which fell from 7.27% to 1.15%, while industrial and services sector performance remained weak. The persistently high policy rate has further contributed to this slowdown by discouraging investment and limiting demand. Lowering the interest rate would have provided much-needed relief to businesses, encouraging production and employment while keeping economic recovery on track.
ICMA Pakistan also believes that a moderate 1% rate cut, rather than an aggressive reduction, would have signaled a balanced approach—supporting economic growth while maintaining confidence in price stability. Keeping the policy rate unchanged in the current economic environment risks prolonging stagnation and delaying recovery. A carefully planned rate reduction would have not only improved macroeconomic stability but also created a more favorable environment for sustainable economic growth.
ICMA Pakistan’s Policy Recommendations
To address these challenges and foster sustainable economic growth, ICMA Pakistan has put forward the following recommendations:
- Gradual Interest Rate Adjustment with Data-Driven Policy Making: ICMA Pakistan recommends a gradual reduction in the policy rate by 50 to 100 basis points. This approach would support economic recovery without destabilizing inflation expectations. The SBP should base its decisions primarily on domestic economic indicators, such as inflation trends, credit growth, and GDP performance, rather than external factors like IMF conditions or geopolitical influences.
- Strengthening Foreign Exchange Reserves through Export Diversification: Pakistan must reduce its dependence on debt-based financial inflows and focus on expanding its export base, particularly in high-growth sectors such as IT services, high-value agriculture, and manufacturing. ICMA Pakistan recommends introducing preferential financing schemes for export-oriented industries, which would help improve the trade balance and stabilize the exchange rate against external shocks.
- Fiscal Discipline and Structural Tax Reforms: The persistent shortfall in tax revenues poses a significant risk to macroeconomic stability. Instead of increasing tax rates, which fuels inflationary pressures, the government should prioritize expanding the tax base. This can be achieved through digitalizing tax collection, addressing tax evasion, and integrating the informal sector into the tax net. Broad-based tax reforms will ensure long-term fiscal sustainability while reducing the disproportionate tax burden on lower-income households.
- Reducing Borrowing Costs and Enhancing Credit Access for Businesses: The current tight monetary stance has led to an 8.43% decline in private-sector credit, restricting industrial expansion and job creation. ICMA Pakistan recommends that the SBP introduce targeted lending programs for key sectors such as small and medium enterprises (SMEs), textiles, pharmaceuticals, and renewable energy. Providing lower-cost refinancing schemes for long-term investment projects will encourage industrial growth without fueling inflation.
- Addressing Structural Challenges Hindering Economic Growth: ICMA Pakistan stresses that monetary easing alone will not be sufficient to stimulate economic growth. Structural challenges such as high energy costs, exchange rate volatility, and inefficiencies in the taxation system need to be addressed. A comprehensive approach, including energy sector reforms and policy measures to improve ease of doing business, is essential for long-term industrial development.
- Proactive Strategies to Mitigate Global Risks and Supply Chain Disruptions: With rising global protectionism and increasing supply chain vulnerabilities, Pakistan needs to diversify its trade partnerships and secure alternative sources of raw materials. The SBP and the Ministry of Finance should collaborate on a contingency strategy to manage external risks, such as potential fluctuations in global oil prices and trade restrictions on key exports.
ICMA Pakistan urges the SBP to consider these recommendations in its future monetary policy decisions. A balanced approach that includes both interest rate adjustments and broader economic reforms is essential to fostering sustainable economic growth and ensuring financial stability in the country.
