Karachi Chamber’s demand for a 500 basis point reduction in the policy rate

The Karachi Chamber of Commerce has demanded a reduction of 500 basis points in the policy rate in proportion to falling inflation.

President Karachi Chamber Iftikhar Sheikh demanded the government to bring the interest rate to 14.5% in the new monetary policy in proportion to the declining inflation. Pakistan’s credit rating has also been upgraded.

He said that the inflation rate has come down to a three-year low, which is a strong justification for a reduction in the policy rate. The single-digit inflation rate of 9.2 percent was seen in October 2021 and the policy rate was 7.25 percent at that time. Therefore, there is an urgent need for a significant reduction in the policy rate to stimulate trade and industrial activities.

Iftikhar Sheikh said that the significant reduction in global commodity prices, improvement in domestic agricultural production has reduced the inflationary pressure, increasing the 7% policy rate of August 2021 to 22% by May 2023 was not effective to control inflation. The policy rate should be reduced while considering alternative monetary measures to accelerate economic growth.

He said the government’s share of total debt rose to 79.3 percent by July 2024, leaving the private sector crowding out.

Zubair Motiwala, Chairman, Businessmen’s Group, said that growth in the LSM index remained at a modest 0.9 percent in FY24, highlighting the negative impact of prolonged high policy rates. The rate cut will provide much-needed relief to the manufacturing sector and boost economic growth.

He said that the private sector’s share of total credit has declined from 29.7 percent in July 2019 to 19.8 percent in July 2024. Lowering the policy rate could encourage private sector borrowing and investment. Pakistan’s real interest rate, i.e. the policy rate minus inflation, is currently 9.9 percent.

Zubair Motiwala said that real interest rates in neighboring countries India, China and Bangladesh are 3.0 percent, 2.9 percent and minus 3.2 percent respectively, so reduction in policy rate will definitely help in improving Pakistan’s regional competitiveness. A 1% reduction in the rate can save about 467 billion rupees in loan servicing costs, a 1% reduction in the policy rate will provide substantial financial relief, reducing the financial burden on the government.