Maintaining the status quo

In a largely predictable move, the State Bank of Pakistan has maintained its interest rates at 11 per cent. Officials believe that the ongoing unrest between Israel and Iran could result in an uptick in inflation. Any rise in oil prices could deliver a significant blow to the Pakistani economy, which has a large fuel import bill. The decision to maintain the status quo is taken to protect Pakistan from once again getting stuck in a whirlpool of high import bills and a destabilised economy. Inflation in May rose to 3.5 per cent against the expected 2.7 per cent, driven by a surge in food prices. The central bank also anticipates that inflation will continue to accelerate before stabilising within its target range of 5-7 per cent in FY26. But, it adds that this outlook remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments. Earlier, analysts had already expected that the SBP would pause its rate cuts, given external pressures.

The business community has expressed disappointment over the SBP’s decision, arguing that the high cost of doing business will hurt reaching the country’s ambitious growth target of 4.2 per cent in FY26. They also note that, given the rate of inflation has come down significantly, high interest rates do not seem viable. Industry insiders believe that this move will end up reversing industrial recovery. Experts have often complained that an unfavourable business environment has pushed many companies out of Pakistan. In recent years, there has been a visible increase in the number of business owners moving their businesses (or part of it) outside the country. This creates problems for the people here. Also, if a company has high operational costs, it is highly unlikely that it will regularly increase the salaries of its employees, leading to a highly demotivated workforce.

These recent times are a test for the SBP to announce financially viable policies and ensure that Pakistan’s road to recovery is long-term and sustainable. According to experts, the IMF has also advised the country to keep the monetary policy tight. Pakistan’s unbridled consumption habits have already brought the country to the brink of default once in very recent times. We cannot afford a replay of those days. But ignoring the demands of industry insiders is also not a good option. Our economic turnaround, as acknowledged by foreign economic commentators, is a miracle, and we must realise that we cannot get second chances. SBP officials and industry stakeholders need to come up with a joint strategy to move the economy forward.