PRAC raises concern over ‘insufficient’ policy rate cut

KARACHI: The Policy Research Advocacy Council (PRAC) has expressed concern over the SBP’s decision to cut the policy rate by only 100 bps on May 5, despite inflation falling to a record low of 0.28% in April 2025. PRAC had recommended a deeper 200 bps cut, citing the need for stronger easing under current macroeconomic conditions.

Mohammad Younus Dagha, Chairman PRAC and former Federal Secretary, stated that the MPC should have considered the challenges to the industrial and export sectors that the very high real interest rates have been posing for them.

The inflation rate in Pakistan has remained below the inflation target of 5-7% since November 2024. In response, the MPC-SBP has gradually lowered the policy rate from 15% to 11% over the last few meetings. Despite this reduction, the 11% policy rate remains high, continuing to stifle private sector credit growth and hinder economic activity especially compared to India (6.0%), Vietnam (4.5%), and China (3.1%). This puts Pakistan at a competitive disadvantage in fostering business expansion and recovery.

Despite inflation falling from 4.9% in November 2024 to just 0.28% in April 2025—well below the SBP’s target range of 5-7%—the policy rate remains significantly high. Even core inflation, which excludes food and energy, stood at only 7.4% in April 2025 and does not justify maintaining such tight monetary conditions. Persistently high interest rates are suppressing private investment, credit demand, and overall economic activity.

Credit to the private sector in Pakistan has fallen to one of the lowest levels among emerging markets. As of 2023, it accounts for just 12.0% of GDP, significantly lagging behind India (50.1%), Türkiye (50.3%), and Bangladesh (37.6%). The gap between public and private sector lending continues to grow, with the government, including public sector enterprises, taking 76.5% of total credit, effectively crowding out the private sector. By March 2025, the private sector received only 23.5% of total credit, down from 29% in March 2022 when policy rates were in single digits.

The Large-Scale Manufacturing Index (LSMI) dropped by 3.5% during Feb 25 compared to Feb 24. The private sector has been hindered by high interest rates, a shrinking share of credit in the market, and excessive collateral requirements.

Dagha stressed the need to increase private sector credit as a percentage of GDP by encouraging commercial banks to expand lending to SMEs, streamline financing processes, and reduce collateral requirements. A larger portion of private sector credit should be directed toward SMEs and key growth sectors.

Copyright Business Recorder, 2025