In a bold move, Pakistan’s Monetary Policy Committee (MPC) slashed the discount rate by 100 basis points to 11 percent, aligning with analysts’ predictions and reigniting hopes for an economic boost. Driven by a dip in core inflation and cheered by government leaders, the decision reflects the government’s push to jumpstart growth, particularly in the beleaguered large-scale manufacturing sector. But with shaky data, a stubborn trade deficit, and lofty regional rates, can this cut deliver the revival Pakistan’s economy so desperately needs?
According to the MPC’s statement, the decision was driven by a notable drop in core inflation (excluding food and energy), which fell from 8.2 percent in March to 7.4 percent in April, a 0.8 percent decrease in just one month. Yet, the MPC’s reasoning doesn’t seem to set a clear precedent for future rate changes. For instance, a smaller 0.4 percent drop in core inflation in March 2025 (from 7.8 percent in February to 8.2 percent) didn’t prompt even a modest 25-basis-point cut, which has left some analysts’ forecasts off the mark. On a brighter note, the consumer price index (CPI) hit an impressive 0.3 percent in April, down from 0.7 percent in March. This achievement has been loudly celebrated by the Prime Minister and Finance Minister, though it’s worth remembering that many economists view 2 percent inflation as the sweet spot for keeping economic growth humming.
However, questions linger about the reliability of inflation data, which plays a big role in evaluating the economic team’s performance. A clear misstep by the Pakistan Bureau of Statistics has raised eyebrows: the sensitive price index (SPI) for the week ending April 30, 2025, reported an 11.62 percent drop in petroleum prices. This contradicts the Prime Minister’s public statement that, despite falling global oil prices, the government chose to maintain domestic prices by hiking the petroleum levy to fund development projects in Balochistan.
On the growth front, the MPC has stuck with its 2.5 to 3.5 percent projection, undeterred by global economic headwinds like the Trump tariffs and intensifying Middle East tensions, which have prompted downward revisions in growth forecasts worldwide. Separately, reports suggest that the recent staff-level agreement under the IMF program’s first review hinged on the IMF’s recognition that Pakistan’s growth projections need adjusting. A document from October 2024 on the IMF’s website highlights ongoing issues, noting that data for sectors making up roughly a third of GDP is flawed, and there are concerns about the detail and accuracy of Government Finance Statistics (GFS).
The government is actively working to address these data shortcomings, with support from the IMF’s Technical Assistance on Government Finance Statistics (GFS) and the development of a new Producer Price Index (PPI). For years, the business community—particularly the large-scale manufacturing (LSM) sector—has pushed for a lower discount rate, as borrowing costs for working capital are a significant expense. Between July 1, 2023, and April 12, 2024, private sector credit grew from Rs106 billion to Rs692 billion compared to the same period this year. Yet, LSM growth worsened, dropping from a slight decline of -0.45 percent (July-February last year) to -1.9 percent this year. Economists suggest that much of the increased credit has flowed into the stock market rather than manufacturing. Even with the discount rate falling from 22 percent in June 2024 to 12 percent, LSM growth remains negative, casting doubt on whether another 1 percent cut will spark a turnaround.
Pakistan’s discount rate, even at 11 percent, is among the highest in the region—compared to India’s 6 percent, Sri Lanka’s 8 percent, and Bangladesh’s 10 percent—making Pakistani products less competitive in global markets. The Monetary Policy Statement (MPS) briefly mentions two concerning trends but quickly puts a positive spin on them. First, it highlights a current account surplus driven by rising remittances, but glosses over the trade deficit, which jumped from $2.183 billion in March to $3.388 billion in April, an increase of $1.205 billion. Second, the MPS acknowledges weak net financial inflows but avoids admitting that inflows have been negative. Instead, it optimistically projects foreign exchange reserves will reach $14 billion, banking on “planned official inflows” that have yet to materialize. This is particularly striking given the State Bank of Pakistan Governor’s recent admission that $16 billion in rollovers are planned for this fiscal year. If achieved, reserves would still fall $2 billion short of rollovers—a vulnerable position.
The decision to cut the discount rate by 100 basis points likely stems from pressure by the government, which has long tied lower rates to LSM growth. It appears the government sought IMF approval to allow the MPC to make this adjustment in hopes of reviving the economy, with the rate cut proceeding only after securing the Fund’s agreement. Pakistan’s latest rate cut is a high-stakes bet on economic recovery, but the odds are steep. With inflation data under scrutiny, private sector credit bypassing manufacturing, and foreign exchange reserves precariously tied to unconfirmed inflows, the MPC’s optimism feels like a leap of faith.
As the government leans on IMF support and regional competitors maintain lower rates, the road to growth remains fraught. For now, the jury is out on whether this monetary maneuver will spark progress or merely paper over deeper structural cracks.