Interest rate reduction requested by BQATI to a single-digit figure

Interest rate reduction requested by BQATI to a single-digit figure

Pakistan's Economy Takes a Step Forward with Single-Digit Interest Rates

The State Bank of Pakistan (SBP) has announced a significant move to lower the policy interest rate to single digits, around 10-11%. This decision, according to experts, has profound implications for industrial growth, job creation, and Pakistan's broader economy.

Boosting Industrial Growth

The aggressive rate cuts, from a record 22% in mid-2024 to an expected 10% by end of 2025, will substantially reduce financing costs for businesses. Lower interest rates make borrowing cheaper, encouraging industries to invest in capital, expand production capacity, and improve productivity.

Large-Scale Manufacturing (LSM) is showing signs of maintaining momentum, thanks in part to increased private sector credit and production activity driven by easier monetary conditions. However, despite these rate cuts, with inflation at about 3.2%, an 11% nominal policy rate still implies a high real cost of capital (~7.8%), which can restrain some industrial investments unless rates fall more.

Job Creation and the Broader Economy

As industries grow and expand output, labor demand is likely to increase, supporting job creation. The more robust GDP growth targeted by the government (around 4.2% in FY26, up from 2.7% previous year) partly hinges on this dynamic.

By stabilizing inflation and easing borrowing costs, monetary policy signals a conducive environment for business expansion, which typically leads to employment growth. The growing macroeconomic stability, backed by IMF support, boosts investor confidence further.

Comparisons with Regional Peers

Pakistan has moved from dangerously high inflation and interest rates to a stabilized macroeconomic environment with inflation close to multi-decade lows (~3.2%) and positive real rates. This creates a stronger growth platform.

Compared to regional peers like India, Bangladesh, and Sri Lanka, which also have moderate single-digit policy rates and generally lower inflation, Pakistan’s easing cycle brings its policy stance closer to regional norms, making it more attractive for investment and industrial growth. However, Pakistan started from a much higher inflation and rate base, so its recent cuts represent a larger relative adjustment.

The Bin Qasim Association of Trade & Industry (BQATI) Request

The Bin Qasim Association of Trade & Industry (BQATI) has requested the State Bank of Pakistan (SBP) to lower the policy interest rate to single digits. According to BQATI, the sector urgently needs affordable credit to recover, expand operations, and sustain jobs. The association believes that a decisive move to single-digit rates would be beneficial for the recovery, expansion, and sustainability of the manufacturing sector.

Shakil Ashfaq, the President of BQATI, stated that high rates have pushed manufacturing activity to historically low levels. He emphasized that a reduction in policy interest rates to single digits would unlock industrial expansion. BQATI reiterated that inflation is currently under control in Pakistan.

Looking Ahead

While these moves narrow the gap with regional peers, real interest rates still impose some cost burdens, indicating that further easing might be required to fully revive Pakistan’s industrial competitiveness and economic expansion. The cost of capital in Pakistan is currently double that of competitors. Challenges remain from currency pressure and fiscal constraints, requiring cautious, data-driven rate cuts to avoid new inflation spikes.

Sri Lanka revived its economy by cutting its policy interest rate from nearly 30% to below 8%. As Pakistan continues its journey towards economic recovery and growth, it will be interesting to see how the SBP navigates these challenges and whether it will follow Sri Lanka's lead in further reducing interest rates.

1. The reduction in financing costs for businesses due to the lower interest rates is expected to encourage industries to invest in capital, expand production capacity, and improve productivity, thereby contributing to industrial growth.
2. As industries grow and expand output, labor demand is likely to increase, supporting job creation and contributing to the broader economy's GDP growth, as targeted by the government.
3. Compared to regional peers, Pakistan's policy stance has become more attractive for investment and industrial growth due to its stabilized macroeconomic environment with moderate single-digit policy rates and low inflation.
4. The Bin Qasim Association of Trade & Industry (BQATI) has urged the State Bank of Pakistan (SBP) to lower the policy interest rate further, arguing that the sector needs cheaper credit to recover, expand operations, and sustain jobs, and to fully revive Pakistan’s industrial competitiveness and economic expansion.

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