KARACHI: Mohammad Younas Dagha, the chairman of the Policy Research and Advisory Council (PRAC), has asked the State Bank of Pakistan (SBP) to lower its policy rate from 19.5 percent to 17.5%.
According to him, this would maintain the real interest rate positive within the required range of 2.4–3.4 percent, as set by the International Monetary Fund.
In a press statement released by PRAC on Tuesday, Mr. Dagha stated that the government’s goal of 3.6 percent real GDP growth can only be met if sustainable debt levels are maintained and the real interest rate is less than the anticipated growth rate. He said, “It is anticipated that the FY25 budgetary measures will raise inflationary pressures by 3–4 percent, pushing inflation to about 15 percent.”
He stated that while SBP’s decision to cut the policy rate to 19.5 percent was a positive move, there was still room to cut it further given the recent significant decline in inflation, which saw it drop from 38 percent in May 2023 to 11.1 percent in July.
He continued, “Despite the encouraging trend, the policy rate has only been lowered by 250 basis points from 22 percent in the last two consecutive monetary policy meetings, a reduction insufficient to effectively mitigate debt servicing burdens and catalyze the robust economic growth.”
“With the rupee appreciating by nearly 9pc against the US dollar following a decline from its August 2023 exchange rate of $305.5, along with favourable global commodity prices and reduced petrol prices from Rs318.4 per litre in September 2023 to Rs269.4 per litre in July 2024, the justification for high policy rates appears increasingly tenuous,” Mr. Dagha said, criticizing the SBP’s role in maintaining the policy rate at a high level.
According to him, the extended high policy rate has significantly hindered economic activity, as seen by the 12.4 percent decline in the Large-Scale Manufacturing Index (LSMI) from 130 in January 2023 to 113.9 in May 2024. “The main reasons for this decline are weaker demand, rising energy costs, and high interest rates,” Mr. Dagha stated.
“The main causes of this decline are high interest rates, growing energy costs, and weaker demand,” he stated. He also added that Pakistan’s fiscal capacity has been stressed by the high policy rate, as interest payments increased by 49.4% between FY23 and FY24, worsening the country’s fiscal problems.
