Pakistan’s central bank’s Monetary Policy Committee has announced a further 2% reduction in the country’s interest rate. Following this decision, the new interest rate stands at 17.50%. Prime Minister Shehbaz Sharif welcomed the 2% cut in the policy rate by the State Bank of Pakistan, calling it a positive development for the national economy.
Undoubtedly, the reduction in interest rates is a result of certain administrative measures by the government and improvements in agricultural production. This means that with the economic measures leading to a continuous reduction in inflationary pressures and the recent cuts in policy rates, growth prospects in industry and services sectors will be bolstered. Although economists still consider the interest rate to be high, they anticipate that it will decrease further as inflation levels drop.
A year ago, Pakistan faced a highly challenging macroeconomic environment, with inflation reaching 38%, foreign exchange reserves dwindling rapidly, and the exchange rate under severe pressure. Today, inflation is falling rapidly, the current account deficit has significantly reduced, the rupee is stable, and uncertainty has lessened. This is due to the continued support from Pakistan’s bilateral and multilateral partners. The stock market is also reaching new heights, and indeed, the government has also worked towards financial stability by curbing unnecessary current expenditures. This integrated policy is now yielding the desired results.
Addressing the country’s long-standing economic issues requires a new perspective and innovative solutions. Climate change, technological advancements, cybersecurity threats, and financial innovations are introducing new dimensions to economic and financial stability risks. The question also arises whether a reduction in interest rates will lead to economic improvement and, most importantly, improve the economic situation for the common people. While the common person may not directly benefit, a lower interest rate makes it somewhat easier for traders, industrialists, and others to borrow from the government. Currently, major investors prefer to keep their funds in banks for better returns rather than investing in large projects. However, a reduction in interest rates will bring this money back into the market, accelerating economic activities.
We must not ignore that a significant reduction in interest rates in Pakistan is not easy. Pakistan faces stringent conditions from the IMF for loans, and there are also requests from traders and industrialists for lower interest rates. A significant portion of Pakistan’s foreign exchange reserves is based on financial aid from friendly countries. In such a scenario, a substantial cut in interest rates could lead to the withdrawal of money from banks. According to ground realities, the demand for a reduction in interest rates in Pakistan is a complex issue that the government and central bank face several challenges in addressing.
Negotiations with the global financial institution, the status of foreign exchange reserves, and current market conditions are all factors that complicate this issue. In fact, the continuous reduction in inflation rates in the country has allowed the Monetary Policy Committee to lower interest rates. According to data available at the end of August, inflation in the country has reached its lowest level in 34 months, and it has dropped to single digits. On the other hand, the stability of the rupee is also a major reason for reducing inflation since Pakistan regularly imports large quantities of commodities, making the stability of the rupee directly helpful in reducing inflation.
In the current circumstances, the Pakistani economy cannot bear the burden of negative news. When the policy rate is reduced under monetary policy, it becomes cheaper for banks to borrow, resulting in commercial banks also lowering their lending rates. This leads to increased borrowing by individuals and businesses, which enhances the circulation of money in the economy and accelerates economic activities. Lower policy rates provide investors with cheaper loans, leading to increased business investment and growth. Despite the rapid decrease in global oil prices, a reduced inflow of foreign exchange, and ongoing debt repayments, the State Bank’s foreign exchange reserves remain stable at around $9.5 billion.
The global economic environment also seems favorable, as indicated by a significant drop in crude oil prices and some improvement in global financial conditions. The government’s five-year plan aims for a 6% GDP growth and to limit inflation to 7-8%, while planning to reduce the fiscal deficit to 6% of GDP this fiscal year and to 4.7% next year. Similarly, the plan aims to reduce the fiscal deficit to 3.6% by fiscal year 2026-27 and further in 2028, with plans to double exports over five years to more than $60 billion. There is also a plan to increase exports by $5-6 billion annually, and the Prime Minister has issued orders to develop a plan with commercial banks to increase farmers’ credit lending.
Increasing GDP growth rate, boosting exports, meeting FBR targets, privatization plans, controlling fiscal deficit, achieving primary balance surpluses, and focusing on public sector development, investment, and agriculture are part of the plan. Energy reforms, expenditure cuts, farmers’ credit lending, and FBR digitization are also included. In recent years, Shehbaz Sharif has repeatedly proposed an economic charter which has not materialized due to disagreements with Pakistan Tehreek-e-Insaf. Whether it’s the five-year economic plan or the economic charter, their main goal is to extricate the Pakistani economy from its current issues.
The proposals for both plans from Shehbaz Sharif indicate his seriousness about the economy and full awareness of its sensitivity. The economic benefits Pakistan gained from its initial five-year plans are well known. The extent of their benefits is evident from the fact that some countries adopted these plans as models to address their own economic issues and are now considered to have stable economies.
Our first five-year economic plan was implemented in 1955 under the guidance of Planning Board Chairman Zahid Hussain. If the agricultural reforms proposed in that plan had been implemented, Pakistan’s economic and social situation would have been very different today. Nevertheless, economic plans continued to be formulated, and during the tenure of the Pakistan Muslim League (Nawaz) from 2013 to 2018, the eleventh five-year plan was announced. The government also outlined its details in a document, but due to unstable political conditions, its implementation did not proceed as intended.
Once again, the PML-N has proposed a five-year plan. Prime Minister Shehbaz Sharif should consult not only experts from various ministries but also leaders from all provinces and parties. If better suggestions come from political opponents, they should be included in the plan. This is not just a matter for one political party but for the entire country’s economy, so political differences should be set aside for the greater good.
We undoubtedly expect that the import volume may increase with the country’s economic recovery. However, it is hoped that the trade balance will improve due to falling crude oil prices, keeping the overall trade deficit under control for the current fiscal year. The government should work to restore investor confidence and provide opportunities for investment in the country.