ICMA underscores need for 200bps cut in policy rate

KARACHI: The Institute of Cost and Management Accountants of Pakistan (ICMA) has raised concerns regarding the potential economic risks of maintaining the current policy rate at 13 percent.

As the State Bank of Pakistan (SBP) approaches its monetary policy announcement on 27th January 2025, ICMA is calling for a strategic reduction of 200 basis points (bps) in the policy rate to stimulate economic activity, foster investment, and strengthen confidence in Pakistan’s economy.

ICMA’s Research and Publications Department highlights several key risks that may arise from keeping the policy rate unchanged. A primary concern is the possibility of an economic slowdown, particularly as inflation is expected to fall to 2.9% in January 2025. Without significant policy rate cuts, economic activity could decelerate, hindering recovery.

Additionally, the real interest rate, which stood at 8.9% in December 2024, remains elevated, potentially discouraging private sector borrowing and limiting both investment and consumption.

The Institute further emphasizes that stagnant GDP growth, currently at 0.92%, could persist or decline without a significant reduction in the policy rate. Furthermore, falling inflation could reduce corporate profitability, which would dampen overall economic momentum. The elevated borrowing costs and a stronger real exchange rate may also reduce Pakistan’s export competitiveness, affecting its position in global markets.

ICMA also points out the strain on government finances due to rising debt servicing costs, which could undermine fiscal stability. Prolonged tight monetary policy may lead to diminished investor and consumer confidence, delaying economic recovery. Additionally, low growth could exacerbate unemployment and poverty levels across the country.

While market expectations suggest a policy rate reduction of 100 to 150 bps, ICMA’s research indicates that a more aggressive 200 bps cut would be far more effective in achieving the desired economic outcomes. A reduction of this magnitude would ensure positive real interest rates, stimulate credit demand, and provide adequate returns for investors.

ICMA’s economic outlook projects that a 200 bps reduction in the policy rate would enhance economic stability, with GDP growth expected to reach approximately 2% by Q2 FY25, followed by further growth in Q3. This decisive policy action is seen as critical for fostering a more resilient and dynamic economy.

ICMA urges SBP to adopt this recommended course of action in its upcoming monetary policy decision to mitigate risks and drive Pakistan’s long-term economic recovery.