ICMA Examines Trade-Offs Between Monetary Tightening, Investment and Economic Growth
Monetary Policy review by ICMA examines Pakistan’s interest-rate decision and its impact on inflation, investment and industrial growth.
The Institute of Cost and Management Accountants of Pakistan (ICMA) has examined the economic implications of the State Bank of Pakistan’s (SBP) latest monetary policy decision, highlighting the trade-offs between inflation control, business financing, investment and economic growth.
In the 27th issue of its Monetary Policy Statement (MPS) Review, ICMA presents a scenario-based assessment of the central bank’s decision to increase the policy rate by 50 basis points to 12%. The review also considers two alternatives: maintaining the rate at 11.5% or reducing it to 10.5%.
The comparative analysis explores how each option could affect inflation, exchange-rate stability, borrowing costs, industrial liquidity and economic recovery. It aims to provide businesses and policymakers with a broader understanding of the choices facing Pakistan’s monetary authorities.
Alternative Policy Scenarios and Economic Risks
ICMA’s review combines historical evidence, external economic risk assessments and industry perspectives to examine the effectiveness of monetary policy under different economic conditions.
It compares Pakistan’s current challenges with the monetary policy responses adopted during the COVID-19 pandemic in 2020 and the Russia–Ukraine conflict in 2022. These comparisons highlight how geopolitical disruptions, energy prices and domestic supply constraints can influence inflation and the effectiveness of interest-rate decisions.
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The review also refers to ICMA’s External Economic Stress Index (EESI), featured in its Pre-MPS Outlook released before the latest policy statement. The index fell to -6.12 in August 2026. However, ICMA cautions that an improvement in the indicator does not necessarily mean Pakistan’s external vulnerabilities have disappeared.
Inflation Remains a Key Concern
The review assesses the policy decision against persistent inflationary pressures and signs of a gradual recovery in industrial activity.
Headline inflation reached 10.3% in September 2026, while core inflation remained around 8.4%. Meanwhile, large-scale manufacturing recorded year-on-year growth of 1.9% during July and August of FY2026–27.
ICMA notes that higher interest rates can help contain inflation expectations and limit second-round price increases. However, monetary tightening can also raise financing costs, restrict business liquidity and discourage productive investment.
The institute argues that policymakers must complement monetary restraint with measures addressing the underlying causes of inflation. These include rising energy costs, wheat-supply pressures and supply-chain disruptions.
Industry Leaders Highlight Financing Challenges
The review incorporates views from economists and representatives of several business sectors, highlighting the effects of monetary policy on industrial operations, exports and investment.
Muhammad Sabir, Principal Economist at the Social Policy and Development Centre (SPDC), warned that monetary tightening cannot directly resolve supply-driven inflation and may constrain economic recovery.
Faisal Sharif, Director for the South Asia Region at GAC Group, stressed the importance of translating macroeconomic stability into productive investment and export diversification. Muhammad Raza, Chairman of the Rice Exporters Association of Pakistan (REAP), highlighted the need for affordable financing for small and medium-sized enterprises (SMEs) and exporters.
Junaid Naqi, Former President of the Korangi Association of Trade and Industry (KATI) and Chairman of IMC, and Hamid Zahur, Former Chairman of the Pakistan Tanners Association, pointed to rising industrial costs, liquidity constraints and concerns about competitiveness.
Usman Shaukat, Vice Chairman of the Pakistan Pharmaceutical Manufacturers’ Association (PPMA), advocated a gradual transition towards a single-digit policy rate. Dr. Imran Batada, President of PAFLA, emphasised affordable financing and targeted support for digital exports.
Zulfiqar Alam, CEO of Pakistan Housing Finance Company Limited, cautioned that excessive monetary tightening could weaken investment, employment and economic recovery.
ICMA Calls for a Balanced Policy Approach
Based on its scenario analysis and economic indicators, ICMA recommends closely monitoring the effects of the rate increase on inflation, exchange-rate stability and private-sector credit.
The review calls for complementary measures to ease energy and food supply pressures, strengthen fiscal discipline, improve external stability and lower financing costs for productive businesses.
ICMA emphasises that monetary policy must balance inflation control with sustainable economic growth, industrial competitiveness and investment. It concludes that a coordinated policy approach is essential to support macroeconomic stability without unnecessarily constraining the productive economy.
