Dwellers of Q Block to heave a sigh of relief after policy rate cut

ISLAMABAD: Pakistan’s largest ticket item on expenditure — debt servicing — is estimated to dip between Rs1 trillion and Rs1.3 trillion during the current fiscal year (FY2025) after the policy rate was cut by 250 basis points (bps).

This slashing down of the debt servicing will help the government curtail debt repayment bills on floating debt liabilities. The country’s expenditure revolves around 3Ds known as debt servicing, defence, and development. With a cut in policy rate from 17.5 to 15 percent in the latest Monetary Policy Committee (MPC), the debt servicing will come down from an estimated cost of Rs9.8 trillion to Rs8.5 trillion in FY25. This figure has also been confirmed by Governor State Bank of Pakistan (SBP).

This reduction in debt servicing will bring a major sigh of relief among Q Block dwellers, first of all, because it will cut down expenditures on debt servicing, which range around 1 percent of Gross Domestic Product (GDP).

Governor SBP Jameel Ahmed stated in Karachi that total interest expense in FY25 was now estimated at Rs8.5 trillion compared to Rs9.8 trillion estimated in the Budget FY25. Renowned economist Dr Ashfaque H Khan, who is affiliated with NUST said on Monday that the State Bank of Pakistan is now moving in the right direction. A cut of 250 bps in the policy rate is an excellent decision.

“Still there is more room for further cut and I expect another similar reduction in the next monetary policy announcement,” he stated.

Needless to mention, the SBP has severely damaged Pakistan’s Budget in the last two years by keeping policy rate at such a high level, he further said. As a result, interest payment has surged to a level where it was consuming three-fourths of tax revenue. With one-fourth revenue left, it was extremely difficult for the Ministry of Finance to pay for all other expenses (defence, running civil administration, subsidies, etc.). Naturally, the Ministry of Finance was forced to borrow to finance other expenditures resulting in the massive rise in public debt. In fact, by keeping interest rates so high for so long a period, the SBP threw the country into a debt trap. The change of heart in the SBP is an excellent development. It is better late than never, he concluded.

Topline Research analyst Shankar Talreja stated that the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has announced a fourth consecutive rate cut and reduced the policy rate by 250bps to 15 percent. This takes the cumulative interest rate cut to 700bps from a peak of 22 percent till May/Jun 2024. SBP reiterated that debt repayments for FY25 are US$26.1bn, slightly down from earlier US$26.2bn due to interest expense adjustment. For the next 8 months, the government has to pay $6.3 billion, rest would be either rolled over or refinanced. As of Jun 2024, short-term securities used to make around 24 percent of the domestic debt, now this has come down to 21 percent. By end of this FY25, this ratio will further come below 20 percent. The government has targeted interest expenses of Rs9.8 trillion for FY25, however, after a decline in interest rates, buybacks of securities, and decline in external debt, the interest expense would be lower than Rs8.5 trillion, saving Rs1.3 trillion or 1 trillion of GDP for the government.