EDITORIAL: In spite of reported pressure by the influential private sector to reduce the discount rate with the objective of fuelling private sector credit to fuel growth, there was little likelihood of a decline. The reason for this assessment can be gleaned from the 14 October 2025 press release uploaded on the International Monetary Fund (IMF) website announcing that the staff-level agreement on the second review under the ongoing USD 7 billion Extended Fund Facility had been reached: “Maintaining an appropriately tight and data dependent monetary policy.
The State Bank of Pakistan (SBP) remains committed to a prudent monetary policy stance, guided by incoming data, including the impact of recent floods and the evolving economic recovery, to ensure inflation remains durably within its target range of 5-7 percent” — a medium-term inflation target that the SBP has not deviated from during the past year though headline inflation declined from over 9.2 percent (July-September 2024) to the post-flood 5.6 percent in October 2025 and the policy rate was reduced from 22 percent in May 2024 to the current 11 percent since 5 May 2025, prompting many domestic economists to argue that the decision to adjust the policy rate reflects the Fund’s assessment.
This view is supported by the full endorsement of the Fund policies in the Monetary Policy Statement (MPS), notably that “the Monetary Policy Committee also emphasised the importance of continuing the coordinated and prudent monetary and fiscal policies, and undertaking the required structural reforms, to ensure ongoing progress towards sustainable economic growth” — contractionary policies that contribute to the very disturbing 44.7 percent poverty levels in the country today as well as high unemployment (estimated at 22 percent in the Pakistan Bureau of Statistics digital survey).
The inflation rate is understated as per independent economists, supported by the IMF’s statement in the 10 October 2024 programme documents that there are “major shortcomings” in the government data and that the Fund is extending a technical assistance to improve government finance statistics and to develop a new Producer Price Index.
Tellingly, the MPS did note the staff-level agreement with the IMF on the EFF and the Resilience and Sustainability Fund as a key development. Additionally, it cited some key macroeconomic developments as factors that influenced the decision to keep the policy rate constant: (i) growth was upped to 3 percent instead of the earlier estimate of 2.7 percent (though multilaterals including the IMF have not yet adjusted the rate) driven by higher industrial and services sector performance.
In this context, it is relevant to note that large-scale manufacturing growth for 2025 is estimated at negative 0.69 percent though the July-August growth has been calculated at 4.44 percent — a rise that is on the back of higher sales rather than output and services sector largely comprises wholesale and retail trade where market imperfections prevail ranging from routine interventions by the aarthis to the smugglers operating along our porous borders; (ii) major Kharif crops’ output remains close to last year’s production in spite of the floods; however, data suggests that cotton, a major input for yarn and textiles that in turn account for a major portion of our exports, suffered a 34 percent decline in output this year; (iii) the foreign exchange reserves have continued to increase, reaching 14,455.2 million on 17 October 2025 in spite of repayment of USD 500 million Eurobond; however, the entire amount is debt-based which must be a source of serious concern; (iv) inflation expectations of consumers and business eased in the latest SBP-IBA sentiment surveys — a survey that can be challenged, given the fact that inflation is on the rise due to the floods and supply disruptions; and (v) global commodity prices depicted mixed trends with price displaying heightened volatility, which effectively implies that any deviation from the MPC projections would be laid at the doorstep of external factors.
There is no doubt that a consistent improvement in remittance inflows is contributing to a lower current account deficit which, in turn, allowed the government to uncap the administrative measures, limiting imports to propel output of industrial units reliant on import of raw material and semi-finished goods.
However, all other data as released by the Finance Division in the October Economic Update and Outlook is troublesome: total foreign investment is down by 64.5 percent (with portfolio investment negative USD 633.3 million in spite of the fact that the discount rate is higher than in regional countries), Federal Board of Revenue collections are up by 19.5 percent in the first quarter though the shortfall from what was agreed with the Fund and budgeted is around 198 billion rupees, though non-tax revenue (on the back of petroleum levy –- an indirect tax whose incidence on the poor is greater than on the rich) rose by a whopping 721.1 percent July-August this year compared to the same period in 2024.
However, as yet there is little if any feel-good factor as far as the Pakistani public is concerned across most socio-economic groups due to the ongoing IMF dictated severely contractionary policies and until and unless the stakeholders can translate pledges of foreign direct investment into actual inflows the uptick in the quality of life will remain extremely restrained.
Copyright Business Recorder, 2025