Surpassing market expectations, the State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has revised the policy rate, cutting it by 200 basis points to 17.5 percent, as the government looks forward to economic progress.
The revised interest rates, applicable from the 13th of September, follow the staggering decline in inflation. Recently, the Pakistan Bureau of Statistics (PBS) revealed that inflation fell to 9.6 percent on a year-on-year basis during August. This single-digit figure is the lowest the country has witnessed during the past 34 months.
Recently, the country’s economic indicators have shown a promising trend, and the government appears confident to attain a sizeable growth rate. Both Prime Minister Shehbaz Sharif and Finance Minister Muhammad Aurangzeb have recently expressed satisfaction with the country’s economic trajectory, highlighting how it is experiencing stability following several tumultuous years.
So, considering the government’s ambitions to steer the economy towards growth, a cut in the policy rate was expected. However, the market expected the interest rate to be slashed by 150 basis points. But, the central bank, in a bid to push the economy towards growth, made the decision amid declining inflation.
It is worth noting here that ever since the MPC slashed the policy rate in its last meeting in July, KIBOR rates had been on the decline. The 3M, 6M and 12M rates decreased by 171bps, 173bps and 131bps, respectively.
The patterns of change showed that there were expectations from the government to further reduce the policy rate, more than it had been doing during the past two months. However, nobody anticipated it to be cut by 200 basis points.
$7 billion IMF package
Pakistan expected the International Monetary Fund (IMF) to approve the $7 billion Extended Fund Facility (EFF) in August after the international lender agreed to the program in July. However, now it seems that the approval might come at the end of this month as the IMF’s board will meet on the 25th of September to discuss it.
The government is eyeing the $7 billion package after completing the $3 billion program earlier in April. Recently, Pakistan’s credit ratings also improved, and the government also took a number of initiatives such as increasing energy prices and hiking the tax collection target to convince the international lender of its commitment toward the program.
The IMF also acknowledged the government’s efforts in achieving economic stability. The finance minister, on his end, also expressed confidence in the economy moving forward. He said that the government has settled matters with the IMF, adding that their board will finalize things this month.
Revised pension mechanism
According to reports, the government is considering increasing the pensions of retired civil servants by 80 percent over the course of two years. This step is being taken to reduce the burden on the national exchequer, considering that Rs1,014 billion were allocated for pensions for the financial year 2024-25.
While the pensions were increased by 15 percent this year, revisions in the future will depend on the inflation rate. The hikes will be in line with the statistics issued by the central bank. This mechanism stems from the recommendations of the Pay and Pension Commission 2020.
Real estate slowdown
While various sectors of the economy are performing well, real estate is among the sectors taking a substantial hit, especially in urban centers such as Islamabad, Rawalpindi and Lahore. This slowdown in the real estate market is being attributed to the government’s policies, particularly the imposition of new taxes. Moreover, the purchasing power of the public has significantly reduced over the past few years as the country struggled through growing inflation and a dwindling economy.
However, while small and medium segments of this sector had been growing, it was the large segments that kept casting a shadow on real estate in these urban centers. What this means is that luxury spending has slowed down and people are not willing to invest in properties in the pricey neighborhoods of these cities.