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Think tank’s Call for Rethinking Pakistan’s Monetary Policy


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In a recent report, the Pakistan Institute of Development Economics (PIDE) has proposed a significant reduction in the discount rate, urging the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) to reconsider its stance.

With the policy rate currently standing at a high of 22%, PIDE’s Macro Policy Lab report suggests a reduction between 50 to 100 basis points (bps). This article delves into the potential implications of such a move and analyzes the current economic landscape, shedding light on the sectors that play a pivotal role in guiding monetary policy decisions.


The Cost of High Policy Rates:

The prolonged period of a 22% policy rate has not been without consequences. One notable cost is associated with disinflation, known as the sacrifice ratio. Research indicates that, on average, a sacrifice of 0.662% of real GDP growth is required for a permanent one percent reduction in inflation. This economic trade-off underscores the need for a strategic reassessment of the current monetary policy stance.


Challenges of High Interest Rates:

The article highlights the adverse effects of sustained high-interest rates on economic investments. Financial stress emerges as businesses defer investment decisions, leading to potential stagnation in economic growth. Moreover, the burden of domestic debt obligations increases, necessitating extra taxes to service these obligations. The situation becomes even more complex with the risk of stagflation, where the economy faces high prices but reduced circulation of money—a dilemma currently faced by Pakistan.


MPC’s Dilemma and Future Policy Outlook:

The MPC’s decision to maintain the policy rate at 22% was influenced by factors such as an increase in headline inflation, volatility in global oil prices, and scheduled increases in gas tariffs. As the MPC prepares to convene on December 12, 2023, the article examines the indicators that will shape its decision-making process. It emphasizes the need for a balanced approach that considers both inflation concerns and the imperative of stimulating economic activity.


Sector-Wise Analysis and Positive Trends:

The article provides a comprehensive sector-wise analysis, focusing on agriculture, industry, and services sectors. Despite challenges, growth rates for these sectors in the first quarter of the fiscal year signal a positive trend for the economy, with an overall growth rate of 2.13% on a year-on-year basis.


External Sector Progress:

The external sector’s health is crucial for a holistic assessment of the economic landscape. The MPC monitors the current account balance, foreign exchange reserves, and export-remittance dynamics. Notably, there has been a significant reduction in the current account deficit, accompanied by improvements in the stability of foreign exchange reserves. However, challenges persist, including a decline in SBP reserves by $217 million in November 2023.


Money Supply Dynamics and Inflation Outlook:

The article delves into vital components such as money supply dynamics, inflation outlook, and global oil prices. Money growth in October and November has surpassed previous averages, and the exchange rate has experienced fluctuations. Addressing inflation, a positive shift in the consumer confidence index and a decrease in inflation expectations indicate growing optimism among consumers. The article discusses the potential implications of these factors on the central bank’s policies.



As PIDE advocates for a reduction in the discount rate, the article concludes by emphasizing the intricate balance needed in Pakistan’s monetary policy. It underscores the importance of considering sectoral performances, external sector dynamics, money supply, and inflation outlook to make informed decisions. The upcoming MPC meeting holds significance in shaping the economic trajectory, and a recalibration of monetary policies may be essential for navigating the challenges and fostering sustainable economic growth.

Abu Bakr Alvi
Abu Bakr Alvi
Mr. Abu Bakr Alvi, Senior Journalist Based in Faisalabad

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