Pakistan's Economy Stalls Despite Interest Rate Cuts - Report

Islamabad, Feb 2 (PTI) Pakistan failed to kick-start economic growth in the first seven months of the current fiscal year despite a massive 10 per cent reduction in the interest rate by the central bank during this period, according to a media report.

The State Bank of Pakistan in the latest cut on January 27 further reduced the interest rate by 1 per cent to set it at 12 per cent, a whopping 10 per cent down from 22 per cent in June last year. It was expected the decision would help to increase money supply and growth.

The Dawn newspaper reported that despite a steep fall in the interest rate, the monetary expansion remained negative during the first seven months of the current fiscal year, noting that the frequent declines in interest rates resulted in a massive outflow of liquidity from banks to the private sector and non-bank financial institutions (NBFIs).

Still, it has failed to stimulate economic growth, it said.

Bank advances to the private sector and NBFIs increased sharply in the second quarter of FY25.

While financial experts believe that the impact of high liquidity supply to the private sector will take time to impact the economy, the government fears that inflation may catch the economy again, imports would be higher, and resultantly the current account would face a deficit which was currently surplus with USD 1.2 billion in the first half of FY25.

According to the newspaper, the latest data showed that the M2 growth (money supply) was negative Rs973 billion in July 1-Jan 17, FY25, compared to a net growth of Rs 416 billion in the same period last fiscal year.

Expanding the money supply is meant to result in lower interest rates and borrowing costs to boost consumption and investment.

The M2 data shows that the broad money expanded by Rs 4.94 trillion in FY24 and Rs 4.17 trillion in FY23. This huge supply, mostly to the government, created only inflation, which reached a record high of 38 per cent in May 2023.

It badly hampered economic growth as the State Bank increased the interest rate to tame surging inflation.