Islamabad — With the federal government projecting headline inflation to fall between 3.5% and 4.5% in July, pressure is mounting on the State Bank of Pakistan (SBP) to consider a substantial cut in the benchmark policy interest rate, currently set at 11%. The forecast, published in the latest monthly economic report from the Ministry of Finance’s Economic Advisory Wing, comes ahead of the crucial Monetary Policy Committee (MPC) meeting scheduled for July 30.
The data signals a favorable macroeconomic environment for easing monetary policy, but so far, the market is predicting only a modest 0.5% to 1% reduction, a move many economists deem insufficient to spur industrial growth and tackle the country’s rising unemployment and sluggish investment climate.
Ministry of Finance Forecast: Inflation Under Control Despite Weather Disruptions
According to the Ministry of Finance’s report, the government expects inflation to remain under control in July, largely due to a sharp decline in food and energy prices. However, the report also warns that recent heavy rains could temporarily disrupt agricultural productivity and supply chains, posing short-term risks to price stability.
Still, the overarching message remains positive: “The economic fundamentals are improving, and we expect inflation to remain subdued unless supply-side shocks persist.” The ministry also noted that monthly inflation in June was recorded at 3.2%, its lowest level in more than two years.
Current Monetary Policy Stance: Interest Rate at 11%
Pakistan’s policy rate, maintained at 11%, was introduced during a time of runaway inflation, peaking at over 38% in mid-2023. While the central bank’s tight monetary policy was aimed at curbing inflation and stabilizing the rupee-dollar exchange rate, many economists now argue that prolonged high interest rates have become counterproductive, stifling growth across key economic sectors.
With inflation now significantly lower, the real interest rate—the difference between nominal interest rates and inflation—is currently around 7.8%, making Pakistan’s real borrowing costs among the highest in Asia.
Economic Policy and Business Development (EPBD): Urging Drastic Rate Cuts
A recently established economic think tank, Economic Policy and Business Development (EPBD), has issued a strong recommendation to the SBP to slash the policy rate to 6%. The EPBD argues that the current real interest rate is not only excessively restrictive but also uncompetitive when compared globally.
“Pakistan’s real interest rate is 7.8%, while India’s is just 3.4% and China’s is even lower at 1.4%. This massive disparity is discouraging private investment and hurting our export competitiveness,” said EPBD’s Chief Economist, Dr. Adeel Hussain.
The think tank warns that unless Pakistan aggressively eases its monetary policy, the country risks falling into a cycle of stagnant growth, joblessness, and revenue shortfalls.
Business Sector Concerns: Expensive Credit Stalling Investment
The industrial sector, particularly large-scale manufacturing (LSM), has seen marginal improvements in recent months due to better energy availability and the stabilization of the rupee. However, business leaders argue that expansion remains impossible in an environment where borrowing costs are prohibitively high.
According to the Federation of Pakistan Chambers of Commerce & Industry (FPCCI), many entrepreneurs are shelving plans for new investment and expansion because commercial loans at 14-16% interest are financially unviable.
“We need working capital and investment loans at single-digit rates. Without that, we simply can’t hire, expand, or compete internationally,” said FPCCI Vice President Muhammad Arshad.
Employment Crisis: High Interest Rates Fueling Unemployment
The EPBD’s report highlights that the unemployment rate in Pakistan has surged to 22%, with the youth unemployment rate even higher. The report attributes much of this joblessness to tight credit conditions, which are choking small businesses and startups, the traditional engines of employment.
“The inability of businesses to access affordable financing is one of the top reasons for Pakistan’s job crisis. If the central bank cuts interest rates to 6%, we estimate that it could generate up to 2 million jobs over the next 18 months,” the EPBD report stated.
Government’s Fiscal Dilemma: Revenue Targets at Risk
High interest rates are also undermining the federal government’s fiscal objectives, particularly its ambitious tax revenue targets set for the 2025–2026 fiscal year.
The Federal Board of Revenue (FBR) has reportedly struggled to meet collection targets due to reduced corporate profits, sluggish imports, and low consumption, all of which are partially tied to the high cost of borrowing.
EPBD economists estimate that if the interest rate were reduced to 6%, it could stimulate enough economic activity to generate an additional Rs 3 trillion in annual tax revenues—a figure that could significantly reduce Pakistan’s fiscal deficit.
Positive Outlook for FY2026: Exports, Remittances Expected to Rise
The Ministry of Finance’s report projects continued economic recovery in the first quarter of FY2026, buoyed by:
- Improved business confidence
- Stable exchange rate environment
- Higher remittances from the Pakistani diaspora
- Gradual recovery in exports and imports
The report also suggests that private sector credit is expected to rise, helping sectors like textiles, construction, and food processing gain momentum.
However, analysts caution that this credit expansion can only occur if interest rates are reduced to realistic levels.
International Comparisons: How Pakistan Ranks on Interest Rates
A comparative analysis of monetary policy across emerging economies reveals that Pakistan’s interest rate regime is far more restrictive than regional and global peers:
| Country | Interest Rate | Inflation Rate | Real Interest Rate |
|---|---|---|---|
| Pakistan | 11.0% | 3.2% | 7.8% |
| India | 6.5% | 3.1% | 3.4% |
| China | 3.0% | 1.6% | 1.4% |
| Bangladesh | 6.0% | 5.5% | 0.5% |
| Indonesia | 5.25% | 2.5% | 2.75% |
This table underscores the urgent need for policy alignment with global standards if Pakistan hopes to attract foreign direct investment (FDI) and stimulate domestic industrialization.
Market Expectations: Limited Rate Cut May Disappoint
Despite the low inflation outlook, market analysts expect only a modest 0.5% to 1% rate cut during the upcoming MPC meeting, citing the SBP’s traditionally cautious stance and concerns over potential external shocks, such as oil price volatility and exchange rate fluctuations.
However, underwhelming policy moves may further discourage investors and deepen the economic slowdown. According to a survey conducted by Bloom Pakistan, 72% of businesses in the manufacturing sector believe that anything less than a 2% rate cut will be ineffective in reviving industrial activity.
Conclusion: Is It Time for Bold Monetary Action?
With inflation now under control, the exchange rate stable, and global commodity prices cooling, the economic conditions are ripe for a bold monetary policy shift. Experts from both government and private sectors agree: a significant interest rate cut is necessary to:
- Stimulate industrial investment
- Boost employment opportunities
- Improve export competitiveness
- Enhance tax revenue potential
- Support long-term economic stability
The upcoming Monetary Policy Committee meeting on July 30 could prove to be a defining moment for Pakistan’s economic direction. A decisive rate cut could usher in a new cycle of growth and confidence, while hesitation could prolong stagnation and deepen public dissatisfaction.
