The State Bank of Pakistan has cut its key policy rate by 200 basis points to 17.5 percent from 19.5 percent. The Monetary Policy Committee (MPC) in a statement has explained its decision saying that it took into “account various factors impacting the inflation outlook”. According to the statement, the real interest rate is still adequately positive to bring inflation down to the medium-term target of 5 to 7 per cent and help ensure macroeconomic stability.

Other reasons for the rate cut include a fall in the global oil prices and a moderate increase in the SBP’s foreign reserves estimated at $9.5 billion on September 6 despite weak inflows and continued debt repayments. Also important is the fact that secondary market yields of government securities have declined noticeably since the last MPC meeting. The SBP, in its policy statement, has also noted  that “inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly”. According to the State Bank, in recent months manufacturing firms have reported increased capacity utilisation and declining inventory.

The Monetary Policy statement has also referred to  business sentiment surveys as supporting the assessment of a moderate improvement in economic recovery, but media reports have highlighted  serious concerns of the business community over the rising costs of inputs, including the borrowing rate.

As is well known, the State Bank’s interest rate decisions make a deep impact on economic activities and business dealings. For quite some time investors and businessmen have been demanding that interest rates be reduced to stimulate the economy. Previously, the interest rate stood at 19.5pc, while inflation in August was recorded at 9.6pc, resulting in a positive real interest rate of 10pc. This gap had led to calls for a substantial rate cut.

Regarding the inflation outlook, the committee said that the decline in August “reflected the impact of contained demand, reinforced by improved supplies of major food items”. The market watchers  expected  a reduction of 150 basis points, with some forecasting a cut of up to 200bps. However, industry leaders stood for a more dramatic reduction of 300-500bps to spur economic growth. At the same time a large body of opinion anticipated a reduction of 150bps as compared to a cut of 100bps in the last monetary policy, especially in view of the higher real interest rates, the ongoing disinflationary trend and weak economic activity.

It may be added here that throughout the financial year FY24, the SBP maintained the interest rate at a high of 22pc. This has had a negative effect on economic activities and employment opportunities.In the last two months, the State Bank made two consecutive cuts — 150bps initially, followed by a 100bps reduction — bringing the total decrease to 2.5 percentage points. Despite these adjustments, the gap between inflation and the interest rate have prompted  demands from the private sector for a higher cut.

The State Bank faced a difficult situation earlier this year, as inflation jumped to 38pc despite a series of interest rate hikes. However, a sharp decline in inflation over the past three months has created an opportunity for the government to inject liquidity into the private sector and boost economic growth.According to official sources, the projected growth rate for the current fiscal year (FY25) is 3.5pc, up from 2.4pc in FY24.

Experts rightly believe that reducing the cost of borrowing will encourage private sector investment, stimulate economic activity and create new job opportunities. The recently secured $7billion loan from the International Monetary Fund (IMF) would prove helpful in this regard. Inflation has not much affected the 7 percent population employed by the state whose salaries were increased by 20 to 24.5 percent in this year’s budget. But the remaining over 90 percent have not received any substantial pay rise for the past four to five years.

It is this segment of the population whose problems of daily living must be addressed by the government. The restrictive SBP monetary policy has led to a sharp rise in the poverty level now estimated at around 48 percent in the country, as high as in some African countries.

The State Bank, in its policy statement, underlined the importance of the  inflows planned under the IMF programme,and the official foreign exchange inflows so that the government can  reduce its reliance on the domestic banking sector and create space for lending to the private sector. Meeting the Fund’s prior conditions is critical for the country’s lending or bailout prospects. But this should not be made an excuse to unnecessarily burden the public with a plethora of taxes.

The most hurtful in this regard is the rising cost of electricity which has upset all household budgets and pushed more people below the poverty line. In this situation the State Bank can play a positive role by further lowering the interest rate which will ultimately lead to an uptick in economic activities and generation of new employment opportunities. At the same time, the government should convince the IMF not to put pressure for a rise in taxes and utility rates.For, the situation is at a crisis point and if civil unrest breaks out, the IMF will not be there  to bail it out.