Think Tank Advocates for Policy Rate Reduction to Boost Economy

The Economic Policy & Business Development (EPBD) think tank has issued a call for a swift and significant reduction in the policy rate, cautioning that the existing high-interest environment is hindering economic advancement and straining governmental financial resources.

EPBD Chairman Gohar Ejaz has suggested a gradual decrease to 6% by the close of 2025, bringing Pakistan in line with regional standards and facilitating a resurgence in manufacturing and exports.

Given that inflation has receded to below 5% and interest rates are at 11%, Ejaz contends that Pakistan’s monetary strategy is dangerously disconnected from economic ground realities, leading to inflated debt servicing expenses and impairing industrial competitiveness.

Ejaz highlighted that the entirety of domestic bank deposits is presently channeled into government securities, thus making the government the foremost borrower from the banking industry. With inflation remaining under 5%, he asserted that the 11% policy rate lacks justification, causing excessive interest payments of approximately Rs 3.5 trillion per year, which are funded by taxpayers for the benefit of commercial banks.

“How does the act of disbursing elevated interest payments to banks, using taxpayer funds, effectively manage inflation, particularly when consumer and mortgage borrowing within Pakistan remains minimal?” Ejaz questioned, emphasizing the disparity between monetary policy and its intended results.

He further observed that Pakistan’s interest rate is almost twice that of its regional counterparts, with India at 5.5% and China at 3%, which creates challenges for domestic industries to maintain their competitive advantage on a global scale. The elevated cost of capital, combined with high electricity tariffs and reliance on imports, has suppressed manufacturing and export-oriented expansion.

“Decreasing the interest rate would not only halve domestic debt servicing expenses but would also provide impetus to business operations, generate employment opportunities, and enhance Pakistan’s competitiveness in global markets,” he stated.

With unemployment at 22% and subdued industrial activity, Ejaz encouraged the SBP’s Monetary Policy Committee to prioritize economic recovery. He also dismissed worries that diminished interest rates would cause instability, attributing the boom-and-bust cycle of 2022 to external disturbances instead of domestic monetary policy.