Karachi, January 29, 2025 – The Institute of Cost and Management Accountants of Pakistan (ICMAP) has called on the State Bank of Pakistan (SBP) to take a more proactive approach in reducing the policy interest rate, stressing that quicker and bolder action is needed to support economic growth and encourage investment. While the institute acknowledged the SBP’s recent decision to cut the policy rate by 100 basis points to 12%, it argued that a more significant reduction of 200 basis points would have been more effective in addressing the economic challenges faced by businesses and industries in Pakistan. ICMAP believes that continuing to lower interest rates toward single-digit levels would better align the country’s monetary policy with the needs of the private sector, which is key to spurring economic expansion.
ICMAP emphasized that a decisive reduction in the policy rate is necessary to create a conducive environment for business growth, particularly as inflation projections for 2025 are expected to stay within the target range of 5-7%. The institute has expressed hope that the SBP will continue its efforts to further lower interest rates, thereby boosting business confidence and helping the private sector recover from the challenges of the past few years.
ICMAP’s Research and Publications Department conducted an in-depth analysis of the link between private sector credit growth and real interest rates in 2024. The findings highlighted a complex relationship between interest rates and credit expansion. Despite a dramatic shift in real interest rates from -6.3% in January to 10.2% in May, credit growth remained sluggish throughout the first half of the year. This was attributed to weak demand, subdued business confidence, and restrictive financial conditions. By July 2024, private sector credit had contracted by -3.2%, despite real interest rates standing at 8.4%, signaling deeper structural issues within the lending ecosystem.
However, the situation began to change with the SBP’s decision to start a monetary easing cycle mid-year, which included a cumulative 1,000 basis point rate cut. These actions gradually revitalized economic activity, leading to a rebound in credit growth. By October 2024, private sector credit growth surged to 10.4%, and continued to show positive growth in November and December, with rates of 6.1% and 7.0%, respectively. This rebound indicated that a more favorable financial environment, fostered by the SBP’s rate cuts, was beginning to take hold.
In its latest review of the SBP’s monetary policy, ICMAP acknowledged the gradual resurgence in economic activity but also warned that external risks could undermine the country’s financial stability. Among these risks are fluctuations in global oil prices, persistent fiscal deficits, and uncertainty surrounding foreign capital inflows. These factors could limit the effectiveness of further interest rate cuts and may hinder sustained credit growth and overall macroeconomic stability.
ICMAP has suggested several complementary measures to ensure that the rate cuts have a broader and more sustained impact on the economy. For instance, the institute advocates for specialized low-interest lending programs targeted at high-growth export sectors such as textiles, food processing, and automotive manufacturing. These programs could help enhance foreign exchange earnings, generate employment, and support the country’s balance of payments.
The institute has also emphasized the need for greater digital financial integration, proposing the adoption of digital tax invoicing systems to improve tax compliance, particularly among small and medium-sized enterprises (SMEs). By enhancing tax collection efficiency, this initiative could broaden the tax base and promote fiscal discipline across the economy. Additionally, ICMAP has called for targeted financial support for emerging industries such as information technology (IT), artificial intelligence, and renewable energy. This support could help position Pakistan as a global leader in innovation and enhance its competitiveness on the world stage.
Given the challenges facing Pakistan’s agriculture sector, ICMAP also highlighted the need for public-private partnerships (PPPs) focused on agri-tech innovations, particularly in climate-resilient crops and precision farming technologies. These efforts are seen as vital for boosting agricultural productivity and ensuring long-term food security.
Finally, the institute has suggested that Pakistan explore the potential of a Central Bank Digital Currency (CBDC), which could modernize the country’s financial system. A CBDC could improve the transmission of monetary policy, increase financial transparency, and enhance digital payment systems.
In conclusion, ICMAP remains firm in its belief that bold monetary reforms and strategic policy interventions are crucial for Pakistan’s future economic growth. The institute stresses that such measures are essential not only for sustaining short-term recovery but also for enhancing industrial competitiveness and long-term financial stability. With the right policies in place, Pakistan can overcome its current economic challenges and unlock its full growth potential.