Karachi: Muhammad Jawed Bilwani, President of the Karachi Chamber of Commerce and Industry (KCCI), has called on the State Bank of Pakistan to significantly reduce the policy rate by 300 to 500 basis points in the upcoming Monetary Policy Committee (MPC) meeting. This request comes in response to the recent decrease in inflation to 6.9 percent in September 2024, and aims to alleviate financial pressure on businesses and stimulate economic activity.

According to Karachi Chamber of Commerce and Industry, Bilwani commended the central bank for reducing the policy rate from 22 percent to 17.5 percent over the last three meetings, but emphasized the need for more aggressive cuts given the sustained decline in inflation to single digits for two consecutive months—the first such occurrence in over two years. He argued that with inflation now under control and commodity prices stabilizing, a substantial policy rate reduction is critical for revitalizing growth in large-scale manufacturing, which has been in decline in recent months.

Bilwani highlighted the stark differences in policy rates and inflation levels compared to previous years, noting that when inflation was at 9.2 percent in October 2021, the policy rate was significantly lower at 7.2 percent. He suggested that similar or lower rates are justified now given the current lower inflation figures.

He also pointed to the challenges faced by the private sector, citing a 19.2 percent drop in the Large-Scale Manufacturing Index (LSMI) from January to July 2024. Bilwani underscored the restrictive impact of high interest rates, reduced access to credit, and excessive collateral requirements on business operations. He referenced World Bank data indicating that collateral for loans in Pakistan averages 153 percent of the loan’s value, often more than the borrowed amount, which severely limits financing options for the private sector.

The KCCI President further noted the disparity in credit distribution in Pakistan, with private sector credit at just 12.0 percent of GDP in 2023, significantly lower than regional counterparts like India, Türkiye, and Bangladesh. He criticized the government and public sector enterprises for absorbing a majority of the credit, effectively crowding out private sector borrowing. By September 2024, private sector’s share in total credit had fallen dramatically, which he attributed to unfavorable policy rates.

Bilwani concluded by stating that while the SBP’s efforts have successfully curtailed inflation, its stringent monetary policy has created an unbalanced credit environment, potentially undermining long-term economic growth. He stressed that the reliance on domestic borrowing to finance fiscal deficits at high interest rates has escalated domestic debt servicing costs in Pakistan, urging a recalibration of monetary policy to support more sustainable economic development.