Maroc - EURASIAREVIEW.COM - A la une - 17/Sep 15:21

Pakistan’s Interest Rate Cut Amid Economic Turbulence – OpEd

Pakistan's economy has long faced a slew of issues, including rising inflation, political instability, and massive external indebtedness. The recent move by the State Bank of Pakistan (SBP) to decrease interest rates by 200 basis points, bringing them down to 17.5%, provides some optimism. This is the third straight rate drop as the central bank uses the country's falling inflation to boost economic development. However, this step comes at a vital time for Pakistan's economic resuscitation, as it depends not only on reduced interest rates but also on getting external funding, maintaining policy continuity, and navigating the conditions of the International Monetary Fund's (IMF) bailout package. Cooling Inflation: A Window of Opportunity For three years, Pakistan has suffered with some of Asia's highest inflation rates, severely hindering economic progress. Prices increased in every industry, with consumers suffering the brunt of soaring energy costs and taxes—both measures needed to guarantee financial stability under the IMF's stringent standards. However, inflation has dropped, reaching its lowest level in almost three years. This cooling has provided the SBP with much-needed space to cut interest rates. The real interest rate remains "adequately positive," according to the central bank, implying that the drop should still assist keep inflation within the medium-term goal range of 5%-7%. More crucially, this rate drop is a balancing act by policymakers: they want to help firms and industries that are struggling with high borrowing costs while also ensuring that inflationary pressures do not reemerge. The central bank's objective of lowering inflation to a sustainable level is crucial to building the groundwork for long-term economic stability. A Ray of Hope for Businesses and Employment The interest rate drop comes as Pakistan's sectors, particularly small and medium-sized firms (SMEs), are grappling with liquidity and excessive borrowing rates. Lower interest rates imply can now obtain more affordable loans, allowing them to invest in expansion, create employment, and increase productivity. The government expects the economy to grow by 3.6% through June 2025, up from 2.4% the previous year. The industrial and services sectors, in particular, stand to profit from the gradual impact of this policy rate reduction. Employment possibilities are another area where this decision might have a favourable impact. Pakistan's young, who make up a sizable proportion of the population, have experienced high unemployment rates. The IMF has emphasised the need for consistent policymaking in fostering an environment that promotes employment development. IMF spokesman Julie Kozek emphasised that a stronger economy will provide not only more employment but also "new opportunities for young people looking to improve their quality of life." This is critical because the country's big youth populace might be used to fuel future growth if they have access to job opportunities. The IMF Bailout: A Lifeline or a Tightrope? While the interest rate drop is a great start, it is only one part of a much bigger picture. Pakistan's immediate economic destiny remains dependent on the success of the IMF's bailout package. The government has already signed a $3 billion standby arrangement with the IMF, and negotiations for a $7 billion expansion fund are continuing, with the IMF board set to evaluate it later this month. To satisfy the IMF's demands, Prime Minister Shehbaz Sharif's administration has taken unpopular but essential moves, including boosting taxes and energy costs. The $7 billion bailout package is a critical lifeline for Pakistan, not only to prevent a sovereign default but also to shore up the country's foreign exchange reserves, which presently total $9.44 billion. These reserves are hardly enough to fund two months of imports, highlighting the importance of obtaining external financing. Furthermore, Pakistan faces debt obligations of around $26 billion this year, a staggering sum that demands the continuous backing of foreign lenders and "friendly" nations such as China, Saudi Arabia, and the UAE, all of whom have played critical roles in assisting Pakistan in rolling over debts. While the IMF's involvement provides temporary respite, the long-term consequences of sticking to the program's terms may be more difficult. The IMF's structural reforms, including fiscal consolidation, tax changes, and subsidy rationalisation, are critical to Pakistan's economic health. However, they frequently result in public displeasure, particularly when these policies raise costs for necessary products and services. The program's success will ultimately depend on the government's ability to strike a careful balance between delivering vital changes and managing the social and political backlash that typically comes with such austerity measures. The Road Ahead: Challenges and Opportunities Pakistan's economic position remains fragile, but the interest rate drop suggests there may be a route ahead. With inflation falling, there is room for expansion, particularly in industries like manufacturing and services, which have been badly affected in recent years. However, recuperation will not be simple. The government's prediction of 3.6% growth by June 2025 is dependent on numerous factors. First, it must guarantee that inflation remains under control, as any increase in pricing pressures might push the SBP to reverse its rate reduction, hurting corporate confidence. Second, obtaining external funding remains a high priority, since the country's capacity to service debt and import critical imports is significantly reliant on its foreign exchange reserves. Finally, despite probable public dissatisfaction, the administration must remain committed to the IMF-mandated structural changes. Julie Kozek of the IMF emphasised the need for continuous policymaking in developing Pakistan's economy, which must continue if the country is to achieve long-term prosperity. She also stated that a better economy will result in greater job possibilities, particularly for the youth. This generational dividend is one of Pakistan's most valuable assets, but only if the government fosters an atmosphere in which young people may prosper via meaningful work. To summarise, the SBP's interest rate drop, while noteworthy, is only one component of the larger approach required to resuscitate Pakistan's economy. It provides a short relief from high borrowing rates for companies and individuals, but the eventual success of this and other measures is dependent on the country's capacity to maintain macroeconomic stability, secure external finance, and complete long-overdue structural reforms. If these components come into place, Pakistan might finally be on the path to long-term recovery.