EDITORIAL: The policy rate was reduced by 50 basis points, according to the statement released by the Monetary Policy Committee (MPC) on Monday with the rationale that inflation, on average, remains within target of 5 to 7 percent July-November though core inflation proved to be relatively sticky owing to relatively benign global commodity prices and anchored inflation expectations.
Surprisingly, the MPC referred to only the medium-range inflation target — 5 to 7 percent that it has been noting in its statements for the past year — but not the decline in the consumer price index (CPI) in November — from October’s 6.2 percent to November’s 6.1 percent.
This may be attributed to the fact that in September 2025 the CPI was 5.6 percent, which implied a rise in October by 0.6 percent, a rise that did not prompt a discount rate rise during the 27 October 2025 MPC meeting. Core inflation did not remain sticky in November and was estimated at 6.6 percent against 7.5 percent in October 2025 — a 0.9 percent significant decline last month.
The MPC’s statement echoes the documents uploaded on the website early morning 11 December, based on data till October 2025: “following the floods inflation increased to 6.2 percent year on year in October driven mostly by wheat and perishable food prices, but core inflation at 7.8 percent has remained moderate.” These figures changed in November, as per government data, and therefore the MPC’s statement does not meet the exhortation by the International Monetary Fund (IMF) in the documents uploaded on its website on 12 December 2025 titled “Pakistan’s Second Review of the Extended Fund Facility (EFF) and First Review of the Resilience and Sustainability Facility (RSF)” to strengthen “its communication and analytical underpinnings of the monetary policy framework, including the MPC’s reaction function, and provide a clearer assessment of the policy stance to anchor longer-run expectations in the face of high uncertainty.”
Additionally, the government pledged to the Fund that policies for the two staples - wheat and sugar - will be formulated and announced by end-May and end-June, respectively. These policies would envisage removing restrictions (regulations that restrict growing sugarcane to particular areas, on use and sale of sugarcane and licensing requirement for new sugar mills — regulations designed to minimise manipulation by the powerful sugar lobby though removing them may increase prices at least in the short term), reducing trade import duties and liberalising exports (may generate artificial shortages given powerful associations representing the elite exporters and importers) and removing price controls (that would negatively impact on consumer prices). The efficacy of these policies would be a function of the ability of the Competition Commission of Pakistan (CCP) to ensure that there is no collusion — a responsibility that the CCP simply has not been able to enforce in the long term reflected by rising prices.
The Fund documents further noted that “the MPC held the policy rate at 11 percent in its last four meetings, noting the expected phase-out of favourable base effects for food and energy inflation, the lagged pass-through from earlier rate cuts, and elevated uncertainty, including the recent floods’ impact.
Despite relatively high real rates, private sector credit has picked up 13.7 percent (yoy) in September, particularly credit to the manufacturing sector and for car financing, albeit from a very low base.” This does not synch with the data released by the Finance Division on its website for November as: (i) credit to private sector (flows) was negative 54.9 billion rupees 1 July to 7 November 2025 against positive 878.7 billion rupees 1 July to 8 November 2024 — a rise attributed not to increased output but a rise in speculative borrowing as well as car financing; (ii) large-scale manufacturing sector rose by 4.7 percent in July-October this year against 8.7 percent in the comparable period the year before; though the perception of this rise is not reflected in recent factory closures, the ongoing negotiations after productive sub-sectors threatened further closures and the exit of multinationals that had been operating for decades in this country; and (iii) car financing coupled with the insistence by the Fund to allow imports of second-hand cars may lead to closures of the mainly foreign car companies that engage mainly in assembly.
The policy rate decline is not backed by government finance statistics, which have, as per IMF’s October 2024 documents, significant shortcomings prompting the extension of an ongoing technical assistance that will be completed by end June 2026.
And the 50 basis points decline is too small, given the decline in core inflation last month, which lends credence to the perception that this was perhaps negotiated with the IMF on the grounds that a decline may be sufficient to signal an investment-friendly climate and arrest the recent closures of multinationals after decades of operations in this country, the ongoing resistance to the tax measures by various manufacturing subsectors that would negatively impact on exports and, last but not least, the discount rate remains the highest in the region — more than double that in competing countries.
To conclude, the MPC’s reemphasis on the need for continuing the coordinated and prudent monetary and fiscal policies, majorly contractionary, are unlikely to fuel growth other than through higher consumption expenditure (retail and wholesale trade) reflected by cheaper imports (with the Fund’s insistence on trade deregulation — a stance at odds with President Trump’s policies and the resulting reciprocity), and in this part of the world through higher smuggling across our porous borders.
The heavy dependence on external borrowings to shore up the foreign exchange reserves is also continuing and claiming “robust momentum across key sectors” with 8 percent unemployment brings such claims to the realm of incredulity.
Copyright Business Recorder, 2025