ICMA calls for ‘significant’ policy rate cut

KARACHI: The Institute of Cost and Management Accountants of Pakistan (ICMA) has released an in-depth analysis of the impact of policy rates on private sector credit growth, alongside a set of policy recommendations aimed at revitalizing Pakistan’s economy.

ICMA’s Research and Publications Department’s analysis highlights that high policy rates throughout FY23-24 have limited private sector credit expansion, which is essential for economic recovery.

According to the data in ICMA’s analysis, private sector credit growth was negative or minimal during periods of elevated policy rates, with the policy rate remaining at 22% for most of FY23-24.

Notable growth in private sector credit, such as the 4.18% increase in December 2023, occurred despite the high policy rate, suggesting that other factors influenced this growth.

The data further reveals a slight uptick in private sector credit growth as the policy rate began to decline from 22% to 19.5% in June 2024, with a 2.05% rise in private sector credit.

ICMA concludes that the peak policy rates, exceeding 21%, were associated with stagnated or negative growth in private sector credit. The recent reductions in the policy rate indicate a potential rebound in credit expansion, signaling a positive shift for economic growth.

ICMA also gave some policy recommendations to the government. ICMA urges the State Bank of Pakistan (SBP) to adopt more aggressive measures in reducing the policy rate, recommending a cut of up to 400 basis points to bring the rate down to around 15 percent by December 2024. This significant adjustment is necessary to align the real interest rate with expected economic growth and to ensure debt sustainability.

ICMA stresses that high policy rates throughout FY23-24 have suppressed private sector credit growth, a key driver of economic recovery.

To improve Pakistan’s economic conditions, the SBP should continue reducing the policy rate but at an accelerated pace to stimulate private sector borrowing and investment.

Additionally, ICMA emphasizes the importance of addressing structural challenges, such as energy pricing reforms, comprehensive taxation reforms, and the privatization of loss-making public entities. These measures are crucial for improving the overall effectiveness of monetary policy and promoting long-term economic stability.

The press release also highlights the need to provide targeted support to industries and exporters by significantly lowering borrowing costs. Reducing the cost of doing business will enhance competitiveness in international markets.

However, ICMA stresses the importance of balancing these measures with careful inflation management to avoid potential inflationary pressures that could negate the benefits of lower interest rates.

ICMA further recommends improving governance, reducing corruption, and enhancing the ease of doing business to create a more favorable environment for sustainable growth. Implementing these recommendations will contribute to Pakistan’s long-term prosperity by supporting economic development, stabilizing prices, and fostering sustainable growth.