EDITORIAL: Monetary Policy Statement (MPS) released on 26 January held the discount rate unchanged at 10.5 percent disappointing the private sector clamouring for a decline to bring their input costs at par with their regional competitors.
The reason: core inflation (non-food and non-energy) has “steadied around a relatively higher level of 7.4 percent in recent months”.
Pakistan Bureau of Statistics (PBS) data reveals that the average July-December 2025 (urban) is 6.9 percent and (rural) 9.5 percent resulting in an overall average of 8.2 percent, not 7.4 percent. Additionally, core inflation has been declining since October and therefore could have been used to justify a small rate decline — between 50 to 75 basis points.
Headline inflation, in contrast, declined from October’s 6.2 percent to December’s 5.6 percent.
The decision to keep the rate unchanged, therefore, cannot be justified on the grounds that the apex bank was discharging its prime responsibility to contain inflationary pressures leading one to assume that, as in previous MPSs, the decision was, in all probability, taken keeping in view the tenuous position of the external account and after consultation with the International Monetary Fund (IMF).
The MPS noted two decisions that, as the Governor State Bank of Pakistan (SBP) explained in his press briefing later, would unlock around 300 billion rupees more as credit for the private sector: reduction of the average Cash Reserve Requirement (CRR) of banks from 6 to 5 percent and reduction of daily CRR from 4 to 3 percent.
He did not mention that it is the government and not the private sector which is by far the largest borrower – with actual borrowing depending on its expenditure requirements and revenue generation capacity (that, the Governor noted, has not shown the growth projected in the budget with an expected 300 billion-rupee shortfall).
In other words, the reduction in CRR may have been targeted to meet the revenue shortfall.
The MPS noted five positive developments. First, Gross Domestic Product (GDP) rose by 3.7 percent for the first quarter of the current year, against 1.6 percent in the comparable period of the year before. Economists have challenged the IMF’s revised growth figure — from 3.6 to 3.2 percent — and projected a rate of between 2.5 percent to 3 percent prompted by IMF noting in its USD 7 billion Extended Fund Facility (EFF) loan approval documents (dated September 2024) “important shortcomings” in the source data available for sectors accounting for around a third of GDP with issues in the granularity and reliability of the Government Finance Statistics.
Second; the Monetary Policy Committee (MPC) noted that consumer confidence has improved. While perception surveys are limited in usefulness due to an implicit surveyor and the surveyed bias yet this claim, repeatedly made by the government and the MPC, is belied by industry closures and exit of several multinationals in recent months.
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There is also rising industrial clamour of an inability to compete internationally due to much higher input costs (inclusive of the 10.5 percent discount rate which is four to five percentage points higher than those prevailing in regional countries) and, in some items, domestically, which incentivises the smugglers across our large porous borders.
Third; SBP’s foreign exchange reserves have risen markedly — to USD 16.1 billion as of 16 January; however, this is not on the back of an improved balance of trade nor due to “a continued uptick in workers remittances and supportive global commodity prices” but due to foreign exchange purchases by the SBP from the interbank currency market (with the September 2025 data showing a massive increase of USD 1.023 billion). This was made possible through the closure of the Afghan border — with smuggling petering out — and strict control of the foreign currency market.
This intervention was critical to keeping the rupee-dollar parity at rates that would not upset the budgeted allocation for interest on debt no doubt considered necessary as the decline in the discount rate was a mere 0.50 percent from June 2025, that is way less than what was probably envisaged by the Minister of Finance till December 2025.
The MPS projected foreign exchange reserves to surpass USD 18 billion by June 2026 subject to planned official inflows (read rollovers of over USD 12 billion from the three friendly countries and multilateral support contingent on approval of the third tranche of the ongoing IMF loan) though it noted that “this outlook is susceptible to some major risks.”
Fourth; tax collections decelerated to 7.3 percent in December falling well short of the target. And finally, the upgrade of global growth by the IMF, though it reduced Pakistan’s growth rate, a projection that would necessitate the end of the two continuing conflicts (Israel-Palestinian and Russia-Ukraine) — a desirable goal though with little evidence of any achievement on the ground.
The SBP has traditionally followed the advice of the IMF in all programmes (including the ongoing twenty-fourth programme) unlike the Ministry of Finance that operates under significant political constraints.
There are unconfirmed reports that the government is engaging with the Fund in an attempt to phase out some of the harsh upfront conditionalities whose success would determine the monetary policy going forward.
Copyright Business Recorder, 2026