Ayesha Saba

The State Bank of Pakistan’s (SBP) decision to cut the policy rate by 200 basis points demonstrates a strategic and measured

approach to fostering economic recovery. Experts emphasize that while this move is intended to stimulate growth, it is crucial to be vigilant about the potential risks that might affect Pakistan's economic stability in near future. In a discussion with WealthPK, Dr. Sajid Amin, Deputy Executive Director of the Sustainable Development Policy Institute (SDPI), said that the central bank’s cautious stance reflects a prudent approach given the temporarily dormant risks in the economy. According to Amin, while the economy faces significant pressures, particularly on the demand side, the risks, though currently subdued, have the potential to reemerge. This necessitates a careful and calculated policy to avoid destabilizing the economic recovery.

He emphasizes that the move comes at a critical time when inflation has shown signs of easing, but the economy remains sluggish. “The reduction is substantial enough to ease financial constraints on businesses, especially small and medium enterprises (SMEs), but not so drastic as to reignite inflationary pressures,” he explained. Expressing his dissatisfaction with the modest cut, Majid Shabbir, Advisor at the Islamabad Chamber of Commerce and Industries (ICCI), argued that a more substantial reduction is necessary to encourage investment and consumer spending. The prevailing sentiment is that the high borrowing costs are stifling growth, particularly of small and medium-sized enterprises (SMEs) that are crucial for job creation and economic resilience.

He highlighted that while the rate cut is a step in the right direction, it may not be sufficient to address the ongoing challenges faced by the economy, including inflationary pressures and low private sector investment. He emphasized that a more aggressive rate reduction can help improve liquidity in the market, making it easier for businesses to access financing without burdensome costs. Majid Shabbir also noted that the effectiveness of such policy changes would depend on the government's ability to implement supportive fiscal policies that enhance overall economic stability. He cautioned that merely lowering the interest rate without accompanying reforms may not yield the desired results.

Credit: INP-WealthPk