With the cooling of inflation, the State Bank of Pakistan (SBP) reached a pause in its multiple rounds of monetary flexibility that could have risk destabilizing its currency or worsening the commercial deficit.
Economists said the government should change its approach to the implementation of economic reforms, since interest rate cuts are not the elixir for growth, after the Central Bank on Monday unexpectedly kept interest rates without changes in 12 percent.
“Rate cuts alone may not meet the growth objectives,” said Vaqar Ahmed, economist and leadership in the Oxford Policy Management team. “They must be complemented with prudent fiscal measures, such as tax reforms, the energy sector and the privatization of state companies, to encourage private sector investment and avoid displacement.”
The rate rate of the Central Bank broke the largest flexibility cycle in the country’s history, disappointing some businesses loaded by the high costs of indebtedness.
Economists were waiting for a cut on Monday, after a series of cuts for a total of 1,000 basic points from a record of 22 % in June last year to relive the economy.
It is expected that the economy, which grew 0.9pc in the first quarter, will win impulse for the rest of the fiscal year, according to the head of the Central Bank Jameel Ahmad. Although the growth of the first quarter is well below its 2.5pc-3.5pc target for the year, the economy is not stagnating.
However, Pakistan’s energy tariffs and the need for fiscal austerity measures under the International Monetary Fund (IMF) program pose significant challenges to revive demand.
Most economists expect the Central Bank to resume the cuts soon, either later this fiscal year or at the beginning of the next despite the concerns about the commercial deficit and the impact on the currency. Pakistan’s commercial deficit in January increased the year 18 per year to $ 2,313 billion.
It is likely that the Central Bank “expect more clarity on the external front or until they have confidence in achieving their medium-term inflation target of 5-7pc,” said Saad Hanif, Chief of Research of Ismail Iqbal Securities.
“Once that happens, I hope the target cuts resume, although at a slower pace.”
Ehsan Malik, CEO of the Business Council of Pakistan (PBC), warned that reducing rates on Monday would have needed a reversion soon, since monetary flexibility increases imports and commercial deficits, which exert pressure on the exchange rate, feeding inflation.
The cash adjusted nation is browsing reforms under an IMF program of $ 7 billion approved in September. The first delivery of the loan is under review, and if it is successful, Pakistan will receive a section of $ 1 billion
Relive demand and investments
Inflation in Pakistan rose to about 40 percent in May 2023, driven by the devaluation of the currency and the elimination of subsidies for the IMF approval. But inflation fell to a minimum close to the 1.5pc in February, providing space for the central bank to increase growth.
Economists also warn about the risk of the government from taking advantage of the lowest interest rates to increase loans for an expansive budget. That would potentially destabilize the progress made under the IMF program and displace the private sector.
The Central Bank of Pakistan reported that government loans have recovered, while private sector credit increased 9.4 % in the second quarter of the current fiscal year.
However, it was expected that the limitations of acquisition power remain a deterrent to revive loans and investment.
“The purchasing power of consumers will take time to recover from the increase in prices of the 75 PC+ between 2021-2024,” said Mustafa Pasha, executive director of Lakson Investments.
Asfandyar Farrukh, president of the Association of the Pakistan chain, said that stagnant income and tax increase have reduced consumer spending power.
Renowned brand retail volumes fell 10-15 percent during the last year and a half, with “thin gain margins” due to frequent discounts, he said, adding that medium and large retailers were consolidating to face, or closed, leaving only a few “players with deep bags” investing growing.
High debt
The Pakistan banking sector has the greatest proportion of the world of government values in relation to its total assets, according to an October 2024 IMF report.
The high internal debt, mainly financed by banks, multiplies the private sector credit, hindering the transmission of politics, reducing the impact of changes in the interest rate in the private sector, the IMF said in its report.
Reza Baqir, former head of the State Bank of Pakistan, emphasized the importance of currency stability to maintain economic growth in Pakistan, given its history of current account problems after periods of high consumption and growth directed by imports.
Pakistan generally establishes his budget for the year in June, with the new fiscal year that runs from July 1 to June 30.
“Where there is a fiscal domain, there is relatively little that monetary policy can do to avoid a current explosion account deficit” if political developments or others lead to populist budgetary policies, “he warned.
