Pakistan & Gulf Economist

Review of rising interest rate

To sustain the price stability, researchers revealed that the Reserve Bank of any country manage the money supply of that country. Therefore, monetary policy plays its role to stable the economic growth by the number of channels. Researchers also recorded that price stability is main contribution of monetary policy for sustainable growth of any country. As it is considered that continuous grow in price level is only because of monetary phenomenon, so for sustaining the price stability monetary policy uses dissimilar tools to effect the money supply. They have also recorded that only the costs are not affected through the monetary policy but it has comprehensive impact on economy’s financing situations. It also affects the credit’s availability and willingness of banks to assume the risks etc. Future predictions about economic activities, inflation, exchange rate, investment and consumption are also affected through the monetary policy.

In May 2019, the State Bank of Pakistan (SBP) has raised its benchmark interest rate by 150 basis points (bps) to 12.25 percent. SBP’s estimates explained that economic growth was predicted to slow in FY2019 but increase modestly in FY2020. Sources mentioned that this slowdown is mostly because of lower growth in industry and agriculture. Greater than two-third of real GDP growth in FY2019 is predicted to come from services.

Economic Indicators Of Pakistan
Details FY18 H1-FY18 H1-FY19
Growth rate (percent)
LSM 5.0 6.6 -1.5
CPI (period average YoY) 3.9 3.8 6.0
Private credit (flow) 14.9 5.7 9.5
Money supply (flow) 9.7 2.3 3.6
Exports 13.7 10.9 1.9
Imports 14.9 18.0 -2.6
FBR tax revenue (billion Rs) 3,844.0 1,722 1,795
Exchange rate (+app/-dep%) -13.7 -5.0 -12.5
million US dollars
SBP’s liquid reserves (end-period) 9,789 14,107 7,199
Workers’ remittances 19,623 9,745 11,030
FDI in Pakistan 3,092 1,633 1,319
Current account balance -18,989 -8,353 -7,615
Fiscal balance (% of GDP)d -6.6 -2.2 -2.7

According to SBP policy report, the current account deficit narrowed to $9.6 billion in July-March FY2019 as against to a deficit of $13.6 billion during the corresponding period previous year, a decline of 29 percent. The reduction is mainly driven by import compression and a healthy growth in workers’ remittances. Moreover, the non-oil trade deficit declined from $13.7 billion in July-March FY2018 to $11 billion in July-March FY2019. Statistics also recorded that foreign reserves fell to $8.8 billion as of May 10 from $10.5 billion at end-March 2019. The SBP’s report motioned that from a monetary policy perspective, a rising portion of the fiscal deficit has been funded by borrowings from SBP.

In absolute terms, the Government of Pakistan borrowed Rs 4.8 trillion from the central during July 1 to May 10 period of the FY2019, which is 2.4 times the borrowing during the same period last year. Report further showed that a main portion of the borrowing from SBP (Rs3.7tr) reflects a shift away from commercial banks which were reluctant to lend to the government at prevailing rates. The resulting increase in monetisation of the deficit has added to inflationary pressures. It added that the annualised headline month-on-month inflation has increased significantly in the last 3-month because of the present hike in local fuel prices and growing food prices and input costs.

On the other hand Pakistan’s business community has urged that the falling Pak rupee value (PKR) value and hike of policy rate has caused chaos like situation in the country, which is a very grave blow to the trade and industry. The Rupee has plunged to life-time low position and rise in policy rate would not attract the financiers in Pakistan.



Furthermore, SBP continues to operate a tight monetary policy in the country despite the clear witnesses that this policy strangulates investment and hampered the economic activities in Pakistan. According to the business community, the IMF bailout package would more create burden on poor segment of society in terms of growing utility rates which would no doubt raise inflation rate in the economy.

At present, every Pakistani possess a debt of Rs 159,000. The major cause of rising inflation in the country is high cost of doing business particularly utility prices, increase in the prices of industrial inputs and shortage of essential items of daily necessity. As the cost of doing business and production is the root cause of lesser competitiveness of our products in international market.


Statistics showed that 12.25 percent policy rate is very high compared to regional economies such as India 6 percent, China 4.35 percent, Sri Lanka 9 percent, Thailand 1.75 percent, Indonesia 6.5 percent, and Malaysia 3 percent. The experts pointed that interest rates have reached 8-year high in the country which would not only hit production and make growing exports impossible. Various sources recorded that the monetary policy after a poorly negotiated deal with the IMF, will hit economic sector as well as the career opportunities while it will deprive the private sector of much-needed credit resulting in defaults and litigation.

In last I would like to mention here the present government should focus to increase the demand for credit by declining interest rates and make easy access to finance. Globally, the aim of monetary policy is to protect the value of the currency in co-ordination with the fiscal policy in order to attain the goals of macroeconomic stability with constraining inflation and expansion of private sector investment. The Government of Pakistan should create its own fiscal space for financing its expenditures instead of borrowing from SBP and other institutions.

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