Think tank for policy rate cut to 6pc to make industry viable
By Khalid Hasnain
2025-07-28
LA HOR E: Economic Policy & Business Development (EPBD)-an independent think tank providing strategic advice to policy makers on the economic policies ecosystem wants the government to immediately reduce policy rate to six per cent to restore industrial viability and economic growth.
`With inflation at 3.2pc, the current 11pc policy rate imposes a crippling 7.8pc real cost of capital on Pakistani businesses. Therefore, the government must bring down the policy rate to 6pc with immediate effect to restore industrial viability and economic growth, demands EPBD chairman and former commerce minister Gohar Ejaz in a conversation with Dawn on Sunday.
He warns that ahead of the upcoming Monetary Policy Committee (MPC) meeting scheduled for July 30, Pakistan`s businesses face an existential threat from unsustainable monetary policy.
According to him, the anticipated minimal 0.5pc-1pc rate reduction fails to address the fundamental crisis destroying Pakistan`s industrial competitiveness and fiscal stability. While regional manufacturers` access capital at an average of 5.5pc policy rates, Pakistani industry faces 11pc-double the regional average, he points out.
This disparity, he says, combined with energy costs of 12-14 cents per kWh versus regional levels of 5-9 cents, creates insurmountable competitive disadvantages. Pakistan`s real interest rate of7.8pc represents the highest burden among regional economies, more than double of India`s 3.4pc and over five times of China`s 1.4pc, he highlights.
This excessive real cost of capital makes Pakistani business investments fundamentally uncompetitive. While India`s supportive 3.4pc real rate enables projected 6.5pc growth in 2026, Pakistan`s punitive 7.8pc real rate constrains growth to just 3.4pc-nearly half of India`s performance, he stresses.
`The growth differential has direct consequences for employment.
Pakistan`s 22pc unemployment reflects businesses unable to expand operations under prohibitive financing costs, while India maintains 4.2pc unemployment through policies that enable business growth,` Mr Ejaz argues, stating that manufacturing capacity sits idle while competitors with supportive monetary policies capture global markets.
`Pakistan`s export-to-GDP ratio has stagnated at 10.48pc compared to India`s 21.85pc and Vietnam`s 87.18pc,` he regrets. The State Bank`s reserve accumulation from $9.06 billion (20th June 2025) to $14.46bn (as of 18th July 2025) relies entirely on $3.1bn in commercial borrowing and $500 million in multilateral funding-not export earnings or business growth.
Mr Ejaz says that this artificial stability masks the underlying deterioration of Pakistan`s productive economy. The country`s tax collection strategy contradicts its monetary policy. The government collected Rs11.9 trillion in FY25 against a target of Rs12.9 trillion and now expectsRs14.1trillioninFY26-an18pcincrease.
This target seems unrealistic when monetary policy actively suppresses the business activity that generates tax revenue.
He argues that high interest rates systematically reduce corporate profitability, limit business expansion, constrain employment growth, and diminish consumer spending-all primary sources of government revenue.
He says that Pakistani businesses cannot generate the profits necessary for robust tax payments while servicing 11pc debt costs. The policy framework ensures continued fiscal shortfalls while demanding impossible revenue growth. On the other hand, the State Bank officials persistently cite import surge fears to justify maintaining high rates, yet historical evidence proves this reasoning is fundamentally flawed. The 2017-18 trade deficit surge to $37 billion occurred despite restrictive monetary policy, driven by CPEC infrastructure requirements-crude oil imports increased $1.4 billion, LNG imports rose $1.1 billion, and coal imports jumped $408 million. Similarly, the 2021-22 deficit expansion to $47 billion stemmed entirely from external shocl(s: Covid-19 vaccine imports alone increased $2.7 billion, while energy crisis imports surged $8.1 billion across motor spirit, crude oil, and LNG as global commodity prices spiked following geopolitical tensions.
Dr Ejaz mentions that Pakistan`s import requirements are driven by energy needs, infrastructure development, health emergencies, and global price shoclcs-none of which respond to domestic interest rate adjustments. `High rates contributednothing to controlling these structural imports while devastating the productive sectors that could have generated export revenue to balance trade accounts. This policy destroys export capacity while failing to address the actual drivers of trade deficits,` he maintains.
Meanwhile, he says, Pakistan`s industrial base erodes as businesses postpone investments, reduce operations, and eliminate jobs due to unaffordable credit. The real economic damage from restrictive monetary policy far exceeds any theoretical import control benefits, he adds.
The country`s industry possesses significant manufacturing capacity, skilled workforce, and export potential constrained only by monetary policy.
He says regional competitors demonstrate that growth-supportive interest rates enable superior economic performance while maintaining stability.
India`s framework supports 6.5pc projected growth, while China`s accommodative policy underpins continued industrial development.
Dr Ejaz says that while the upcoming MPC decision on 30th July determines whether Pakistani businesses receive the monetary support necessary for growth and competitiveness, or continue facing systematic disadvantages that ensure economic decline, reducing policy rates to 6pc 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.