KARACHI, November 05 2024: The recent 250 basis point (bps) policy rate cut by Pakistan’s central bank, bringing the rate to 15%, marks a significant shift in the country’s economic strategy. This move, which goes beyond the market’s anticipated 120-150 bps reduction, aims to ease the government’s borrowing costs and is expected to have far-reaching effects on Pakistan’s fiscal health and broader economic stability. The rate cut opens up significant opportunities across various sectors, improving Pakistan’s fiscal position while laying the foundation for growth.
Key Outcomes and Macro Impacts
- Immediate Reduction in Debt Burden: The rate cut is expected to reduce Pakistan’s interest payments for the fiscal year 2025 (FY25) by approximately Rs 1.3 trillion. This brings total interest expenses down to around Rs 8.5 trillion from the previously budgeted Rs 9.8 trillion. This relief, roughly 1% of GDP, will provide much-needed fiscal space, helping the government manage its fiscal deficit more effectively by easing debt servicing costs—the largest drain on the country’s finances. With more easing anticipated, the fiscal space could expand to over Rs 2.5 trillion, or about 2% of GDP, further strengthening fiscal management.
- Improved Fiscal Management: The savings from reduced interest payments, combined with effective domestic debt profiling and prudent debt management, are likely to enhance fiscal discipline. With timely savings, Pakistan’s fiscal deficit could fall to around 5% of GDP, or under Rs 6 trillion—well below the previously estimated 6.9% of GDP (or Rs 8.5 trillion). This would mark a historic low in the country’s fiscal deficit and reflect the success of the central bank’s policy and fiscal reforms.
- Inflation and External Account Stability: Tightening fiscal discipline and reducing reliance on new debt issuance will help contain inflationary pressures, as the money supply growth slows. With better fiscal management, inflation is expected to stabilize. This discipline will also positively impact Pakistan’s external accounts, supporting a stronger Pakistani rupee and potentially boosting foreign exchange reserves. Improved reserves would strengthen Pakistan’s import cover and external buffers, enhancing economic resilience.
- Declining Global Oil Prices and Lower Business Costs: Lower global oil prices combined with reduced interest rates can significantly reduce operational costs for businesses, both in the private and public sectors. These lower business costs will encourage investment and boost business confidence. The potential for cheaper energy prices sets the stage for sustainable economic growth, further improving the competitiveness of domestic industries and fostering industrial expansion.
- Enhanced Investment Climate with Tax Reform: To build on the positive momentum from the rate cut, Pakistan should focus on expanding and diversifying its tax base. Targeting under-taxed sectors such as agriculture, retail, and property, along with reducing the tax burden on the formal sector, would create a more attractive environment for investment. Tax reforms will help ensure a more sustainable and inclusive economic growth trajectory.
In Summary:
The policy rate cut represents a critical step towards improving Pakistan’s fiscal health and long-term economic stability. It has the potential to reduce the fiscal deficit, control inflation, stabilize the external account, and foster a more favourable environment for growth. However, for the full benefits to materialize, continued fiscal reforms are essential. If implemented effectively, these changes could pave the way for a more resilient and dynamic economic future for Pakistan.
