EDITORIAL: Monetary Policy Committee (MPC) chaired by Governor State Bank of Pakistan, Jameel Ahmad, decided to keep the policy rate unchanged at 10.5 percent though it did acknowledge that “the macroeconomic outlook has become quite uncertain following outbreak of the war in the Middle East.”
While correctly arguing that the intensity and duration of the conflict will be important determinants of the impact on Pakistan’s economy yet one can take exception to the use of the word “uncertain” given that major fuel supply companies in Gulf countries have already invoked force majeure that relieves them from contractual obligations due to events beyond their control; included in the list are Saudi, Emirati, Kuwaiti and Qatari companies – Pakistan’s main suppliers.
The ongoing conflict has raised bond yields substantially with markets poised for a significant rise in inflation due to a massive rise in energy prices – from mid-60 USD per barrel just prior to the start of hostilities to over USD 100 per barrel and rising. Expectations of futures markets have been downgraded in the West with the general perception being that rates will rise globally.
The five reasons for keeping the policy rate stable, as provided in the Monetary Policy Statement (MPS), are inexplicable.
First, inflation rose to 5.8 percent in January to 7 percent in February – a rise of 1.2 percent. To show lack of consistency in the decision-making process it is relevant to note that on 15 December 2025 the MPC lowered the policy rate by 50 basis points with headline inflation declining by only 0.5 percentage points - from 6.1 percent in November to 5.6 percent in December. It is also noteworthy that the massive rise in the prices of petrol and products would push the country’s poverty line to higher than the 44.7 percent calculated by the World Bank in June last year (comprising 107.95 million people).
The MPS also notes that core inflation increased to around 7.6 percent – a claim whose source was not shared, given that as per the Pakistan Bureau of Statistics the January rate was 7.2 percent declining to 7.1 percent last month for urban while remaining unchanged at 8.3 percent for rural in the two months.
Second; a current account surplus in January 2026 though not noted was the current account deficit of 1.1 USD billion July-January 2026 with a trade deficit widening to USD 20.5 billion in the first half of the current year against USD 15.9 billion in the same period the year (which prompted the State Bank to purchase foreign exchange from the interbank market to shore up reserves).
Third; large-scale manufacturing (LSM) growth of 0.4 percent year-on-year by December 2025 with cumulative growth estimated at 4.8 percent for the first half of the year - a rate that is being challenged by the sector citing 150 factory closures and the exit of multinationals as well as a clamour to reduce input costs (including the policy rate) to enable the players to compete regionally.
Fourth; and what is even more inexplicable is the claim by the MPS that “consumers’ inflation expectations and confidence improved, while those of businesses remained broadly stable in February”, given that the MPS acknowledged the rise in inflation in February; and fifth; tax collections remained below target and noted that collections rose by 10.6 percent July-February 2026 – an achievement in itself that points to unrealistic targets set and agreed between the authorities and the International Monetary Fund (IMF).
The only explanation for the rate being kept stable reinforces previous rationale provided in these columns: the pressure by the government to reduce rates (a key determinant of the rate at which the private sector can borrow – a major input for the LSM) as a means to fuel private sector growth overriding the nudging from the IMF.
In the Second Review documents the Fund stipulates that “the monetary policy should remain appropriately tight and data-dependent to ensure that inflation remains anchored within the SBP’s target range.” In the event that the Middle East conflict continues there is no doubt that the policy rate would be raised by 150 to 300 basis points (bps).
However, to-date the exhortation by the IMF to SBP to “continue efforts to deepen the interbank FX market, while allowing exchange rate flexibility to act as the main shock absorber in the face of significant uncertainty,” has yet to be implemented.
The decision by the MPC this time can also be seen as lack of flexibility in the face of harsh upfront IMF conditions – a situation that has become all the more entrenched since 2019 as the country’s economy became increasingly fragile due to the failure to implement reforms by successive administrations coupled with the Fund’s refusal to entertain any suggestions for a more phased approach to reforms that is less burdensome for the general public and therefore less politically challenging.
Copyright Business Recorder, 2026
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