SBP’s policy rate decision

Considering the current economic landscape and the influence of geopolitical factors, the SBP likely made a wise choice by maintaining the policy rate instead of yielding to various external pressures.

I have consistently highlighted the significant liquidity challenges stemming from inadequate tax revenue and disappointing export performance. A reduction in policy rate does not automatically equate to economic stimulation as it merely offers some relief to borrowers, whether they are corporations or the government.

It remains to be seen how the reduction in the Credit Reserve Requirement (CRR) by 1 percent that would yield an additional Rs 311 billion in liquidity will actually contribute to economic growth. According to SBP data from November 2025, commercial banks’ lending to the private sector stands at Rs 13,421 billion, while the SBP’s open market operation (OMO) injection on January 16 amounted to Rs 13,829 billion. This discrepancy is concerning, as the amount injected by the SBP should ideally be far less than the total bank advances. This is the main reason for the plunge in advance to Deposit rate as bank lending to the private sector is not rising in the same proportion.

With the SBP revising its growth forecast upward, the primary challenge will be to drive growth toward the new target of 3.75 percent to 4.75 percent for FY26, up from the previous estimate of 3.25 percent to 4.25 percent. This aligns with Prime Minister Shehbaz Sharif’s five-year Uraan Pakistan initiative, which focuses on export-led growth and aims to achieve a $1 trillion economy by 2035.

Holding the policy rate steady is a prudent move, particularly as the coming months may see inflation rise due to the dual celebrations of Ramazan and Eidul Azha during which, not only are food prices expected to increase, but the currency in circulation could also grow to Rs 1.5 trillion, driven by a likely rise in consumer spending that would push inflation higher.

To meet the growth target, banks must enhance their corporate lending. Simultaneously, it is crucial for the Pak Rupee to remain stable. A stronger currency will support this goal.

However, there is a risk that if tax revenues fall short or exports do not recover, liquidity pressures could intensify. Another potential method for stimulating the economy would be to direct some of the OMO injections to the corporate sector, which may require support from the IMF. Nonetheless, Rs 311 billion is relatively modest in the context of achieving a 4.75 percent growth rate. We should monitor and compare this with the third-quarter advance-to-deposit ratio (ADR) for the current fiscal year for further insight.

It is pertinent to note that SBP has not addressed the increase in currency circulation and the underlying factors contributing to its ongoing growth. Additionally, could this increase in currency circulation be also linked to a rise in crypto currency activity?

As anticipated, there is optimism that crypto currencies will greatly benefit Pakistan’s economy, as significant measures are being taken to regulate the sector and establish the country as a global leader in the crypto industry. However, it is important for the public to understand the extent to which the local currency is involved in purchasing crypto assets, as some of the estimates suggest that millions of individuals would engage with digital assets.

Transparency on this matter is essential, as it is the SBP’s duty to inform the public about how much of the Pakistani Rupee is used for these transactions, or if no PKR is being utilised at all.

Copyright Business Recorder, 2026