Pakistan's Interest Rate Paradox: Economic Growth Eludes Despite Reduction

Pakistan's economic growth remained stagnant in the first seven months of FY25, even after a significant interest rate cut by the State Bank. Despite a 10% reduction, monetary expansion was negative. Increased liquidity to the private sector hasn't stimulated growth, raising concerns about potential inflation and current account deficits.

Despite a substantial 10% cut in the interest rate, Pakistan has struggled to ignite economic growth during the initial months of the current fiscal year, a media report reveals.

The State Bank of Pakistan further slashed the interest rate by 1% on January 27, setting it at 12%, down from 22% in June of last year. The expectation was that this would foster growth by increasing the money supply. However, The Dawn reported that economic expansion remained negative, attributing it to frequent rate declines that led to liquidity outflows towards the private sector and non-bank financial institutions.

While loans to the private sector and NBFIs surged in the second quarter of FY25, experts anticipate a delayed impact on economic growth. Meanwhile, the government is concerned about inflation and increased imports potentially affecting the current account surplus. Recent data indicate negative money supply growth, contrasting with the rising supply in previous fiscal years intended to reduce borrowing costs and spur consumption and investment.

(With inputs from agencies.)