Karachi, January 27, 2026 – In a bold and urgent wake up call to policymakers, the Institute of Cost and Management Accountants of Pakistan (ICMA) today declared that sustaining the current high policy rate of 10.5 percent is limiting Pakistan’s ability to reduce debt, costing the country approx. Rs. 1.94 trillion in potential debt relief over a period of time. ICMA’s latest Monetary Policy Statement Review notes that prolonged high borrowing costs are steadily eroding fiscal flexibility, slowing investment, and constraining debt reduction efforts. Earlier on January 26, 2026, the SBP’s Monetary Policy Committee kept the policy rate unchanged, contrary to widespread market expectations of a 50 to 100 basis point cut.
At the heart of ICMA’s Research and Publications Department analysis is a critical insight: the policy rate is more than an inflation fighting tool it is a decisive factor shaping government borrowing costs and the nation’s debt trajectory. With inflation largely supply driven rather than demand fueled, tight monetary policy has limited effect on prices but imposes a heavy fiscal burden through elevated interest expenses, widening the gap between debt servicing and economic growth.
A carefully phased reduction in the policy rate can narrow this interest growth gap, ease debt pressures, and create meaningful fiscal space all without compromising price stability when combined with vigilant monitoring and supportive fiscal measures. ICMA analyzes the role of the policy rate in improving Pakistan’s debt sustainability using the following Debt Sustainability Framework. Similar analytical methodologies are employed by leading international institutions, including the IMF, World Bank, European Central Bank, and OECD, to assess debt dynamics, fiscal risks, and long-term sustainability.
ICMA’s analysis shows that at the current 10.5 percent rate, public debt is declining slowly, but sustaining high borrowing rates keeps approx. Rs. 1.94 trillion in potential debt relief over a period of time unrealized. The analysis highlights that prolonged high rates increase the interest growth gap, raise borrowing costs, and limit fiscal and economic policy flexibility. ICMA’s scenarios reveal:
- At 10.5 percent, debt sustainability remains low but stable, with limited fiscal buffers.
- At 10 percent, sustainability improves moderately, offering greater resilience to shocks (change ? 2.06 percent, relief ? approx. Rs. 1.65 trillion).
- Lower policy rates move debt dynamics toward a comfortably sustainable trajectory, accelerating debt reduction relative to GDP growth.
ICMA stresses that Pakistan’s inflation remains largely supply driven, limiting the impact of tight monetary policy. However, the policy rate directly affects the real interest rate, which determines government borrowing costs and debt dynamics. Sustaining high rates narrows fiscal space and slows improvements in debt sustainability especially when paired with the current primary surplus (around 2.7 percent of GDP in Q1 FY26) and projected medium term economic growth of 3.5 percent.
ICMA’s Recommendations
Based on its analysis, ICMA recommends the following steps:
1) Careful Policy Rate Monitoring
ICMA urges policymakers to evaluate the impact of the sustained high rate on debt and investment and adopt a measured approach that balances fiscal discipline with the need to reduce borrowing costs.
2) Strengthen Fiscal Consolidation
With FBR revenue growth slowing to 7.3 percent in December 2025, decisive measures are needed: improve tax administration, broaden the tax base, and accelerate privatization of loss-making state-owned enterprises. These actions will expand the primary surplus and create fiscal space.
3) Ease Interest Burden to Promote Investment
High borrowing costs continue to stifle industrial expansion and export growth. ICMA recommends targeted incentives, including sector specific credit lines and lower financing costs for export oriented and high value industries, to diversify revenue streams and strengthen economic resilience.
4) Leverage External Stability
Resilient remittances and foreign exchange reserves of $16.1 billion provide a vital buffer against shocks. Policymakers should streamline remittance channels and encourage diaspora investment in productive sectors to reinforce macroeconomic stability.
5) Implement Supply Side Reforms
Since inflation is largely supply driven, ICMA calls for structural reforms across agriculture, energy, and industry. Improving productivity, rationalizing energy tariffs, and removing bottlenecks will address the root causes of price pressures and support cleaner, sustainable growth.
ICMA concludes that “With real GDP growth at 3.7% in Q1 FY26, rising consumer and business confidence, strong remittances, and stable global commodity prices, Pakistan has an immediate opportunity to reduce debt and stimulate investment, but decisive action is required now. Pakistan possesses the evidence and the framework, and what is required now is the courage and precision to act across monetary and fiscal authorities for the benefit of every Pakistani, ICMA states firmly.”
