Along with reducing inflation, the State Bank of Pakistan (SBP) opted to prevent its rate of rate cuts, which could potentially lead to currency volatility or an extended trade deficit.
Economists urged the government to prioritize economic reforms, emphasizing that reducing interest rates alone is not a cure for development. The central bank’s decision to maintain a policy rate at 12% on Monday came as a surprise for many analysts.
Economist and team lead War Ahmed with Oxford policy management said, “Rate cuts cannot meet the goals of development.” “They need to be supplemented by prudent fiscal measures such as tax improvement of state -owned enterprises, energy sector viability and privatization to encourage them to encourage private sector investment and prevent the congestion out.”
The rate of Central Bank stretched the largest relaxation cycle in the history of the country, making some businesses cumbersome with high lending costs.
Economists were expected to cut on Mondays to revive the economies, with a record 1,000 base points from a record high of 22% in June last year to revive the economy.
According to the central bank head Jamil Ahmed, the economy, which grows 0.9% in the first quarter, is expected to gain momentum for the rest of the financial year. Although the growth of the first quarter is below its 2.5% -3.5% target for the year, the economy is not stalling.
However, there are important challenges to revive the requirement of fiscal penance measures under the Energy Tariff and International Monetary Fund Program.
Most economists hope that the Central Bank will soon resume the cut, either despite concerns about the impact on the business deficit and currency at the beginning of this financial year or the next one. The trade deficit increased to $ 2.313 billion in January at 18% year.
Saad Hanif, head of the research of Ismail Iqbal Securities, said, “The Central Bank” is likely to wait for more clarity on the external front or unless he is convinced of achieving their medium -term inflation target. ,
“Once this happens, I hope to resume the rate cut from them, although slow.”
Pakistan Business Council (PBC) CEO Ehsan Malik warned that the cutting rates will soon be reversed on Monday, as monetary spontaneity increases imports and trade deficit, which puts pressure on exchange rates, promotes inflation.
The cash-tight nation is navigating reforms under the $ 7 billion International Monetary Fund (IMF) program approved in September. The first installment of the loan is being reviewed, and if successful, Pakistan will get an installment of $ 1 billion.
Revise demand and investment
Inflation increased by about 40% in May 2023, inspired by currency devaluation and subsidy removal for IMF approval. But inflation fell to a low-lying level of 1.5% in February, providing a room to promote development for the central bank.
Economists have also warned the risk of the government’s risk of taking advantage of low interest rates so that the loan can be increased for the expansion budget. This will potentially destabilize the progress made under the IMF program and congestion out of the private sector.
The SBP reported that government borrowings have rebound, while the credit of the private sector increased by 9.4% in the second quarter of the current financial year.
However, the shortage of purchasing electricity was expected to remain a barrier for revived and investment.
“Consumer purchasing power will take time to overcome 75%+ price hike between 2021-2024,” said Mustafa Pasha, Executive Director of Laxon Investments.
Chenstore Association of Pakistan President Asocter Farrukh said that stable income and increased taxes have reduced consumer spending power.
The retail sections of the famous brands fell 10–15% in the last year and a half, with a continuous discount “razor-pale profit margin”, he said, integrated to cope with medium and large retailers, or closed, only a few “deep-packet players” were investing in development.
High debt
According to the October 2024 IMF report, Pakistan’s banking sector holds the largest proportion of government securities relative to its total assets.
The IMF said in its report that high domestic loans, mainly funded by banks, removes private sector credit, obstructing policy transmission, obstructing policy broadcasting, reducing the effects of changes in interest rate on the private sector.
Former SBP chief Reza Baqir emphasized the importance of foreign exchange stability to maintain economic growth in Pakistan, in view of the history of current account issues after the period of high consumption and imported development.
The country usually sets its budget for the year in June, in which the financial new year runs from 1 July to 30 June.
“Where there is fiscal dominance, it is relatively low that monetary policy will be able to prevent an ongoing account deficit” if political or other events give rise to populist budgetic policies, “he warned.
