Defying expectations of a rate cut of up to 100 basis points (bps), the first Monetary Policy Committee (MPC) meeting of the current fiscal year decided to keep the policy rate unchanged at 11.0 per cent on Wednesday. In backing up its decision to keep rates steady, the MPC noted that while inflation had decelerated to 3.2 per cent year-on-year in June and core inflation also declined slightly, the inflation outlook has somewhat worsened in the wake of higher than anticipated adjustment in energy prices, especially gas tariffs, though it is expected that inflation will remain within the target range. The trade deficit is also expected to widen further in FY2025-26, which can lead to inflationary pressures, amidst the pickup in economic activity and slowdown in global trade. Prudent, though these steps might be, they will not help in dispelling the angst about the country’s flagging growth rate. In its Economic Outlook Update on Tuesday, the IMF cut its growth forecast for the current fiscal year to 3.6 per cent, well below the government’s 4.2 per cent target. And while exports grew by a reported 4.67 per cent in FY2024-25, they began declining in April, with three straight months of contraction to end the fiscal year. That being said, the current account is still in surplus, with workers’ remittances rising by over $8 billion in the outgoing fiscal and financial inflows improved, helping drive the SBP’s FX reserves past the $14 billion mark.
However, stability can only carry the government’s economic narrative so far. It has to eventually become a platform for growth. While ordinary people have long been discontent with the higher taxes and tariffs they have had to put up with as the price for this stability, signs now seem to be growing that the frustration is spreading to the business community too. Prior to yesterday’s MPC meeting, the Pakistan Business Forum (PBF) and the Karachi Chamber of Commerce and Industry (KCCI) separately called on the SBP to slash its key policy rate by up to 500 bps, arguing that double-digit interest rates are crippling industrial output and deterring investment. The worrying trend in exports and lacklustre growth projections would seem to back this sentiment. The business community also claimed that an 11.0 per cent policy rate in the current moderate inflation climate was not logical. But the MPC has gone in a different direction and borrowing costs still seem to indicate a desire to maintain the gains that have been made thus far rather than to power the economy forward.
Amidst the discontent that the MPC’s decision is likely to generate, it is important to remember that the policy rate was twice as high last June and that Pakistan’s road to reform under the IMF programme is far from over. Key targets like improving revenue collection still require a lot of work, with the FBR missing its target for the previous fiscal by around Rs200 billion, and some, like privatising SOEs, seemingly not making much headway at all. There is an urgent need to make more headway on these goals, which will perhaps allow for further easing on the monetary front. In the meantime, the struggle for ordinary Pakistanis remains the same. They are faced with prices that are still too high and an economy that offers too little in terms of jobs and incomes.