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Express Tribune
2 days ago
- Business
- Express Tribune
Inflation forecast puts pressure on SBP
Two days before the interest rate-setting meeting, the federal government on Monday predicted the inflation rate to stay in the current range of 3.54.5% in July, putting the spotlight on the central bank to substantially cut the rates to single digits. "Inflation is projected to remain within 3.5 to 4.5%, though risks from recent heavy rains may affect agricultural yields and supply chains," according to the monthly economic outlook report that the Economic Advisor Wing of the finance ministry released on Monday. The report also came a day after a new think tank, Economic Policy and Business Development (EPBD), demanded the State Bank of Pakistan (SBP) reduce the interest rate to 6%, which is currently the highest among the regional economies. Pakistan's real interest rate of 7.8% represents the highest burden among regional economies, more than double India's 3.4% and over five times China's 1.4%, said EPBD in a statement on Sunday. It added that this excessive real cost of capital makes Pakistani business investments fundamentally uncompetitive. While India's supportive 3.4% real rate enables projected 6.5% growth in 2026, Pakistan's punitive 7.8% real rate constrains growth to just 3.4% – nearly half of India's performance, according to EPBD. The Monetary Policy Committee (MPC) of the central bank is going to meet on July 30 to set the interest rate for the short term. The market is not expecting more than a 1% cut despite calls from across all segments and the government to reduce the rates. The finance ministry said in its report that Pakistan's economy is expected to sustain its recovery in early fiscal year 2026, supported by improved macroeconomic fundamentals and rising investor confidence. Large-Scale Manufacturing (LSM) is likely to maintain momentum in June 2025, driven by increased private sector credit offtake and expanding production activity, it added. However, with an 11% interest rate despite low single-digit inflation, the investors do not feel confident to expand businesses. Pakistan's businesses face an existential threat from unsustainable monetary policy, according to EPBD. The anticipated minimal 0.51% rate reduction fails to address the fundamental crisis destroying Pakistan's industrial competitiveness and fiscal stability, it added. With inflation at 3.2%, the current 11% policy rate imposes a crippling 7.8% real cost of capital on Pakistani businesses. The finance ministry stated that the economic rebound is expected to boost imports of raw materials and intermediate goods while supporting exports of value-added products. It said that strengthening domestic demand, a stable exchange rate, steady global commodity prices, and improved foreign demand are likely to enhance exports, remittances, and imports in July 2025, reinforcing external sector stability. Inflation last month fell to 3.2%, which the finance ministry attributed to a significant decline in perishable food prices, which fell by 10.6%, easing pressure on the overall food basket. Additionally, the housing, water, electricity, gas, and fuels group also recorded a decline of 3.3% in prices. The finance ministry said that for the new fiscal year, policy priorities include continued fiscal consolidation, enhanced revenue mobilisation, modernisation of the agriculture and industrial sectors, and improvements in the business climate and human capital development. It added that because of these factors, real GDP is expected to grow by 4.2% in this fiscal year, alongside continued price stabilisation. The ministry underlined that the last fiscal year showed that Pakistan's economy demonstrated clear signs of recovery and growing resilience. The economy sustained growth momentum at 2.7%, while inflation fell sharply to 4.5%, supported by a lower policy rate, exchange rate stability, and prudent macroeconomic management. However, independent economists dispute the 2.7% economic growth figure. The EPBD said that reducing policy rates to 6% would restore competitive financing for Pakistani businesses, enable industrial expansion necessary for employment creation, support export growth through affordable working capital, and generate the business activity required for tax revenue growth. With 59% of government debt in floating-rate instruments, this reduction would immediately lower debt servicing costs, currently consuming 46% of federal expenditure, and deliver immediate fiscal relief of Rs3 trillion annually. Pakistani businesses operate under impossible conditions compared to regional competitors. While regional manufacturers access capital at an average of 5.5% policy rates, Pakistani industry faces 11%, double the regional average, stated the think tank. EPBD said that the interest rate disparity, combined with Pakistan's energy costs of 1214 cents per kWh versus regional levels of 59 cents, creates insurmountable competitive disadvantages. Likewise, the economic growth differential has direct consequences for employment. Pakistan's 22% unemployment reflects businesses unable to expand operations under prohibitive financing costs, while India maintains 4.2% unemployment through policies that enable business growth, according to EPBD. Manufacturing capacity sits idle while competitors with supportive monetary policies capture global markets. Pakistan's export-to-GDP ratio has stagnated at 10.48% compared to India's 21.85% and Vietnam's 87.18%, said EPBD. High interest rates systematically reduce corporate profitability, limit business expansion, constrain employment growth, and diminish consumer spending – all primary sources of government revenue. Pakistani businesses cannot generate the profits necessary for robust tax payments while servicing 11% debt costs. The policy framework ensures continued fiscal shortfalls while demanding impossible revenue growth.
Business Recorder
09-07-2025
- Business
- Business Recorder
EPBD for fundamental restructuring of debt utilisation
ISLAMABAD: Economic Policy & Business Development (EPBD), a think tank, has called for fundamental restructuring of Pakistan's debt utilisation, advocating that borrowed resources be diverted from unproductive consumption towards productive economic investment. EPBD maintains that Pakistan's Rs7.2 trillion annual debt burdens should finance growth-generating activities rather than subsidizing banking profits and inefficient state-owned enterprises, said a statement shared with the media. The think tank claimed that the World Bank article in UNDP's latest development report validates this position, explicitly stating that Pakistan's debt is "mostly used to finance consumption rather than investment" and that "public borrowing continues to crowd out private sector credit." The institution documents that Pakistan "contracts new debt equal to around 28% of GDP annually" while allocating merely "2% of GDP" to development spending - a stark indicator of resource misallocation. Moreover, EPBD had stated that the ratio of current consumption to actual development deteriorated from 2.2:1 to 10.3:1 over a period of 15 years, demonstrating systematic shift away from productive investment. EPBD argues that Pakistan's current approach wastes borrowed capital on guaranteed banking returns through government bond purchases and SOE subsidies that generate no economic returns. Instead, this debt should finance manufacturing expansion, export infrastructure, technology adoption, and private sector development that creates employment and generates sustainable returns to service future obligations. EPBD added that Pakistani businesses face 11% financing costs compared to 5.5% regional averages, making them uncompetitive while banks earn guaranteed profits from public funds. With 59% of government debt in floating-rate instruments, reducing policy rates from 11% to 6% would generate Rs 3 trillion annually - resources currently transferred to financial institutions rather than productive economic activities. It further stated that the World Bank confirmed that Pakistan 'achieved a primary surplus in fiscal year 2025," providing fiscal space to redirect debt utilization. Rather than continuing current patterns of consumption-focused borrowing, EPBD advocates channelling these resources toward manufacturing competitiveness, export development, and business expansion that builds Pakistan's capacity to service debt through productive economic activity. Regional competitors demonstrate superior performance by utilizing borrowed funds for business development and industrial expansion rather than banking sector subsidization and SOE support. Their approach generates 6% annual growth by directing debt toward activities that create value, employment, and sustainable economic returns. EPBD maintains that Pakistan must choose between wasteful debt utilization that enriches financial institutions and SOEs versus productive debt deployment that builds economic capacity. The organization advocates immediate policy realignment to redirect borrowed resources from unproductive consumption toward manufacturing development, export infrastructure, technology adoption, and private sector expansion that generates sustainable returns and employment. Copyright Business Recorder, 2025
Business Recorder
08-07-2025
- Business
- Business Recorder
Pakistan's Rs7.2trn annual debt burden should finance growth-generating activities, says think tank
ISLAMABAD: Economic Policy & Business Development (EPBD) a think tank, called for fundamental restructuring of Pakistan's debt utilisation, advocating that borrowed resources be diverted from unproductive consumption toward productive economic investment. EPBD maintained that Pakistan's Rs7.2 trillion annual debt burden should finance growth-generating activities rather than subsidising banking profits and inefficient state-owned enterprises. The think tank claimed that the World Bank article in United Nations Development Programme (UNDP) latest development report validates this position, explicitly stating that Pakistan's debt is 'mostly used to finance consumption rather than investment' and that 'public borrowing continues to crowd out private sector credit.' Govt officials on boards of cos: remuneration restriction lifted The institution documented that Pakistan 'contracts new debt equal to around 28% of GDP annually' while allocating merely '2% of GDP' to development spending - a stark indicator of resource misallocation. Moreover, EPBD had stated that the ratio of current consumption to actual development deteriorated from 2.2:1 to 10.3:1 over a period of 15 years, demonstrating systematic shift away from productive investment. EPBD argued that Pakistan's current approach wastes borrowed capital on guaranteed banking returns through government bond purchases and state-owned enterprises (SOE) subsidies that generate no economic returns. Instead, the debt should finance manufacturing expansion, export infrastructure, technology adoption, and private sector development that creates employment and generates sustainable returns to service future obligations, the think tank said. EPBD added that Pakistani businesses face 11% financing costs compared to 5.5% regional averages, making them uncompetitive while banks earn guaranteed profits from public funds. With 59% of government debt in floating-rate instruments, reducing policy rates from 11% to 6% would generate Rs3 trillion annually - resources currently transferred to financial institutions rather than productive economic activities. It further stated that the World Bank confirmed that Pakistan 'achieved a primary surplus in fiscal year 2025,' providing fiscal space to redirect debt utilization. Rather than continuing current patterns of consumption-focused borrowing, EPBD advocated channeling these resources toward manufacturing competitiveness, export development, and business expansion that builds Pakistan's capacity to service debt through productive economic activity. Regional competitors demonstrate superior performance by utilising borrowed funds for business development and industrial expansion rather than banking sector subsidisation and SOE support. Their approach generates 6% annual growth by directing debt toward activities that create value, employment, and sustainable economic returns, according to EPBD. Govt notifies 7% hike in federal pensions from July 1 EPBD maintained that Pakistan must choose between what it called wasteful debt utilisation that enriches financial institutions and SOEs versus productive debt deployment that builds economic capacity. The organisation advocated immediate policy realignment to redirect borrowed resources from unproductive consumption toward manufacturing development, export infrastructure, technology adoption, and private sector expansion that generates sustainable returns and employment.
Express Tribune
02-07-2025
- Business
- Express Tribune
Inflation falls sharply, undercuts tight policy
Listen to article The government has surpassed its annual inflation target, which increased at a pace of 4.5% in the last fiscal year, mainly because of a slump in food prices, reinforcing the widely held independent view that the extent of monetary tightening was excessive and unwarranted. The Pakistan Bureau of Statistics (PBS) reported on Tuesday that the average increase in the cost of a basket of essential goods and services stood at 4.5% for FY2024-25 — well below the official target of 12% and far lower than initial projections by the International Monetary Fund (IMF) and other multilateral lenders. The IMF had initially forecast inflation at 15%, later revising it downwards. However, these elevated projections pressured the central bank to maintain double-digit interest rates, which ultimately hurt economic growth. The central bank has kept the interest rates at 11%, which are far higher than the headline and average inflation rates for the just ended fiscal year. This solely benefited the commercial banks at the expense of businesses and the federal government that gives away around half of the total budget in interest payments. The current approach of maintaining 11% rates, while allocating Rs7.2 trillion for domestic debt servicing, ensures continued economic stagnation, whereas regional competitors strengthen their industrial bases and export capabilities, according to the Economic Policy and Business Development (EPBD). The government has allocated a total Rs8.2 trillion for debt servicing, which is equal to 46% of the approved budget for this fiscal year, which began on Tuesday. The EPBD, an independent think tank, stated last week that the Rs7.2 trillion was going to the banking sector as guaranteed profits. With 59% of government debt in floating-rate instruments, reducing policy rates from 11% to 6% would generate immediate savings on the majority of debt stock, it added. It further said that the government compounded this burden by issuing Rs2 trillion in fixed Pakistan Investment Bonds at peak rates of 22% during the last two fiscal years and locked in excessive costs for banks' benefit, according to the statement. The think tank stated that by reducing the interest rates to 6% because of substantial reduction in the inflation rates, the government can immediately save Rs3 trillion in the debt cost. Even a small portion of these savings can help generate jobs by lowering the cost of doing business, according to EPBD. The average inflation rate in rural areas remained at 3.3%, while it ended at 5.3% in the urban centres, according to the PBS. The annual inflation rate also eased to 3.2% in June, which was in line with the Finance Ministry's projection for the month. In its monthly economic outlook report, the ministry reported this week that the inflation was projected to remain between 3-4% in June. With the fresh inflation rate, the gap between headline inflation and the key policy rate of the SBP has widened to 7.8%. The Monetary Policy Committee last month left the policy rate unchanged 11% despite a persistent decline in inflation. For the new fiscal year, the government has approved a 7.5% inflation target, which still provides further room for reducing the interest rates. Core inflation, calculated after excluding energy and food items, has eased both in cities and towns. The rate slowed down to 6.9% in cities and 8.6% in rural areas, said the PBS. Urban annual inflation eased to 3% and it slightly accelerated to 3.6% in rural areas last month. The PBS reports inflation data from 35 cities and covers 356 consumer items. In rural areas, it covers 27 centres and 244 consumer items. The data showed that food prices again decelerated after picking up pace a month earlier. The food inflation rate in cities slowed down 4.2% but slightly increased to 2.4% in rural areas. The government has failed to fulfil its promise of keeping the prices of sugar in check, thanks to the decision of allowing exports last year. Sugar prices jumped one-fourth last month compared to a year ago, according to the PBS. The increase in sugar prices is also contributing to higher tax collection, as the government has linked the 18% sales tax on sugar with the fortnightly inflation rate. Eggs became expensive by 25%, milk powder 22% and meat 11%. Onion prices were still lower by 56% compared to a year ago, followed by 23% reduction in prices of tomatoes and wheat 17%. Electricity charges were lower by 30% last month, compared to a year, petrol was still 2% cheaper than last year despite increasing taxes.
Express Tribune
28-06-2025
- Business
- Express Tribune
Govt urged to end bank subsidies
Listen to article An independent think tank has urged the government to choose between subsidising already-profitable banks or diverting limited fiscal resources toward productive sectors by ending the policy of banks guaranteed returns on government borrowing. The Economic Policy and Business Development (EPBD), a new policy research institute, released the statement the same day a federal cabinet body criticised excessive subsidies to banks in the name of attracting remittances. The Economic Coordination Committee (ECC) of the Cabinet was informed Friday that banks had claimed Rs200 billion under the Pakistan Remittances Initiative during the current fiscal year — Rs115 billion more than the budgeted subsidy. The EPBD stated that the current fiscal structure forces a choice between supporting economic growth and subsidising banking profits through guaranteed government payments. It argued that Pakistani businesses face structural disadvantages compared to regional peers who enjoy policies that enhance rather than restrict productive economic activity. The think tank stressed that economic growth requires policy alignment with development objectives — not bank profit maximisation. The current approach of keeping policy rates at 11% while allocating Rs7.2 trillion for domestic debt servicing ensures stagnation, while regional competitors grow their industrial and export capacity. The government has allocated Rs8.2 trillion for total debt servicing — equal to 46% of the 2024-25 budget. Of this, Rs7.2 trillion will go to domestic banks holding government securities. With 59% of public debt held in floating-rate instruments, the think tank argued that reducing policy rates from 11% to 6% would yield immediate savings. The government worsened this burden by issuing Rs2 trillion in fixed-rate Pakistan Investment Bonds (PIBs) at peak interest rates of 22% over the past two years, locking in excessive costs to the benefit of banks, it added. By cutting interest rates to 6%, in line with falling inflation, the government could save Rs3 trillion on debt servicing. Even a portion of this amount, the think tank said, could lower business costs and stimulate employment. A 6% rate would still offer banks real returns while easing debt burdens. The savings could support manufacturing revival, industrial expansion, SME financing, technology upgrades, and export growth. The statement added that Pakistan's future depends on diverting resources from guaranteed banking profits to investments that create jobs, enhance productivity, and ensure long-term growth. Pakistani businesses cannot expand or generate employment while banks earn risk-free profits from public funds. In contrast, regional economies maintain 5.5% policy rates, allocate only 25% of budgets to debt servicing, and still achieve 6% GDP growth by prioritising business development. The EPBD challenged the claim that lower interest rates fuel current account deficits. It cited the $19 billion deficit in 2021-22, which it attributed to exceptional, non-interest-sensitive imports such as $3.2 billion in COVID-19 vaccines, $15.6 billion in fuel, and $1.7 billion in smartphones. It said high interest rates did nothing to limit those imports and instead suppressed domestic activity. The think tank added that guaranteed profits have led banks to retreat from commercial lending, opting instead for risk-free government bonds. With 97.3% of bank investments tied up in government debt, virtually no capital remains for working capital, expansion, or technology adoption. Manufacturers struggle to finance inventory, exporters lose global competitiveness, and small businesses are excluded from credit. Pakistan's banks have effectively become bond traders, contributing no value to the real economy while earning from taxpayer-backed securities. The think tank also criticised the remittance structure, noting that Rs87 billion went to banks for basic transfersfunds that could instead support small businesses and entrepreneurship. Its statement came as the ECC met to deliberate the future of remittance-linked subsidies. The finance ministry has decided to end the subsidies in 2024-25 due to pressure from banks and International Monetary Fund (IMF) constraints. The State Bank of Pakistan told the ECC it could no longer offer implicit support under IMF rules. Although the ECC requested a transition plan, the finance ministry said no study has determined any positive impact of these subsidies. Officials noted that funds largely benefit banks and exchange companies, not overseas Pakistanis sending remittances. The central bank informed the ECC that remittance promotion schemes have existed since 1985, but their effectiveness remains unverified. Without reform, the remittance subsidy bill could swell to Rs500 billion in coming years, warned a finance ministry official. The think tank reiterated that businesses do not need subsidies or special treatment — just a level playing field. Reducing interest rates to 6% would bring Pakistan in line with regional rivals, restore manufacturing competitiveness, and improve global market access for exporters. Such a move would also accelerate technology adoption and job creation across sectors, the EPBD argued. Although manufacturing capacity exists, it remains underutilised due to lack of financing. With 97% of banks' balance sheets locked in public debt, there is little scope to support private sector growth. Regional countries have demonstrated that supporting businesses through growth-oriented credit policies can deliver 6% growth while maintaining fiscal stability, it added.
