KARACHI – The Pakistan Business Council said an interest rate cut of about 200 basis points on December 16 is possible, with further cuts expected in early 2025 if inflation remains under control.
“This cut will bring the interest rate closer to the prevailing three-month interbank offered rate (KIBOR), which is currently around 12.5 percent,” said Ehsan Malik, CEO of the People’s Bank of China. He suggested that the State Bank’s Monetary Policy Committee (MPC) should cut the real positive interest rate in line with its future inflation estimates.
A gradual reduction would reduce risks and create fiscal space to ease the burden on tax-burdened sectors, including wage employees.
“This would also help in job creation, demand generation, and increase tax revenues. In addition, it would enable the export sector to price its credit more competitively than other countries.”
Ehsan Malik noted that Pakistan is showing signs of economic stability, citing previous periods of stability during the first year of IMF programs in 2000, 2008, 2013 and 2019. He warned against shifting to growth too quickly, pointing out that previous periods of growth after stability led to crises in the external account.
The State Bank of Pakistan’s base interest rate of 15 percent, after deducting the November CPI of 4.9 percent, creates a real positive rate of 10.1 percent. From January 2013 to July 2020, the true positive rate in Pakistan remained between 0-5 percent, but later turned negative and recovered to the current rate of 10.1 percent.
He compared Pakistan’s real positive interest rate with other countries, noting that Bangladesh’s real interest rate is 10 percent, while its inflation rate is 10.87 percent, leading to a negative real rate of 0.87 percent. On the other hand, Egypt has a positive real interest rate of 1.25 percent.
Sri Lanka’s real positive rate matches that of Pakistan at 10.1 percent, where the inflation rate was negative 2.1 percent against the policy rate of 8 percent. India’s real positive interest rate is relatively low at 0.5 per cent, while the real interest rate is 6.5 per cent and inflation is 6 per cent.
He also noted that India’s foreign exchange reserves currently stand at $657 billion, even after using $48 billion over the past nine months to stabilize the value of the Indian rupee.
Separately, United Business Group (UBG) general sponsor SM Tanveer called for a 500 basis point rate cut, following November’s CPI fall to 4.9 per cent. He stated that further interest rate cuts would reduce bank interest rates to single digits, making loans more accessible and affordable for businesses and consumers, encouraging investment and stimulating economic activity.