KCCI urges 300bps cut as inflation plummets to 6.9% in Sep

October 13, 2024 (MLN): President Karachi Chamber of Commerce & Industry (KCCI) and Chairman Policy Research & Advisory Council (PRAC) have advised the Central Bank to reduce policy rate by at least 300 basis points in the next MPC meeting in line with a notable decrease in inflation to 6.9% in September 2024.

In a joint statement issued, Jawed Bilwani and Younus Dagha stated that as September’s decline in inflation marked the second consecutive month of single-digit inflation after more than two years of high inflationary pressure, the State Bank should now reduce the policy rate more aggressively.

They said that with inflation now under control and commodity prices stabilizing, a significant policy rate cut of at least 300 basis points was crucial to alleviate the pressure on businesses and stimulate economic activity.

Lower interest rates would reinvigorate growth in large-scale manufacturing, which has seen consistent declines in recent months.

President KCCI Jawed Bilwani stated that the Large-Scale Manufacturing Index (LSMI) in Pakistan plummeted by 19.2% during July 2024 compared to January 2024, underscoring the challenges faced by the private sector due to high interest rates, reduced access to credit, and excessive collateral requirements.

According to the World Bank, collateral for loans in Pakistan averages 153% of the loan’s value—often surpassing the amount borrowed—further limiting private sector financing, he added.

President KCCI, while referring to the latest available data of the World Bank, further informed that the private sector credit in Pakistan has fallen to one of the lowest levels among emerging markets, accounting for only 12.0% of GDP as of 2023 which was significantly lower than India where private sector credit stood at 50.1% of GDP, Türkiye 50.3%, and Bangladesh 37.6%.

“The widening gap between public and private sector lending is a critical concern, with the government and public sector enterprises absorbing 79.7% of total credit, effectively crowding out the private sector. By September 2024, the private sector’s share in total credit dropped to a mere 20.3%, down from 29% in March 2022, when policy rates were more favorable in Pakistan”, he added while citing Bangladesh where only 22.4% of the total credit was availed by the public sector during FY2024, allowing their private sector to flourish.

He noted that while the SBP has successfully curbed inflation, its stringent monetary policy has led to an unbalanced credit environment that could undermine long-term growth prospects.

The reliance on domestic borrowing to finance fiscal deficits at high interest rates has also caused Pakistan's domestic debt servicing costs to soar, he said, adding that the markup on domestic debt increased by 50.4%, from Rs4.8 trillion to Rs7.2 trillion during FY24, largely driven by elevated policy rates.

Chairman PRAC Younus Dagha emphasized that despite three consecutive reductions in policy rate, the current positive real interest rate of 10.6% was still the highest in the region,significantly constraining the private sector credit growth and hampering economic recovery.

In contrast, the real interest rate in India stood at 2.9%, followed by 2.8% in China and a negative rate of minus 0.4% in Bangladesh.

“This places Pakistan at a distinct disadvantage in fostering private sector-led business expansion”, Dagha opined while stressing the need to gradually lower the policy rate to below the projected real GDP growth rate of 3.6% to ensure rapid economic recovery and sustainable debt management.

Chairman PRAC also underscored the urgent need to increase private sector credit as a%age of GDP by encouraging commercial banks to expand lending to SMEs and key growth sectors.

Simplifying financing processes and reducing collateral requirements would allow for a more equitable distribution of credit, unlocking the private sector’s potential to drive economic growth.

“As countries such as India, Bangladesh and Vietnam have successfully sustained growth with lower interest rates, the SBP should also adopt a similar growth-oriented approach. A substantial reduction in the policy rate would not only ease fiscal and economic pressures but also stimulate private-sectorinvestment and create a more conducive environment for business expansion”, he added.

He said that PRAC remains committed to advocating for policies that promote sustainable economic growth, reduce fiscal imbalances, and prioritize private sector development.

A further reduction in the policy rate was imperative to fully harness the benefits of lower inflation and foster a robust, private-sector-driven recovery.

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