Breaking: Pakistan’s Central Bank Slashes Policy Rate, Signals Cautious growth Agenda
ISLAMABAD – The State Bank of Pakistan trimmed its key policy rate by 50 basis points, lowering it to 10.5 percent as authorities pursue a balance between macro-stability and renewed economic activity amid challenging global conditions.
The central bank says the move aims to support lasting growth while acknowledging that the external habitat remains tight for exporters and that financing conditions have grown more stringent.
Projections for the coming financial year place real GDP growth for FY26 in the upper half of the previously estimated 3.25-4.25 percent band, signaling cautious optimism about a stabilization-to-recovery path.
However, analysts and industry voices, especially in textiles, caution that the economy still hinges on external borrowings to bolster foreign exchange reserves. With unemployment hovering around 8 percent, critics say official claims of robust momentum in key sectors might potentially be overstated.
Pakistan continues to grapple with restorative measures while weak political will and bureaucratic resistance to reforms persist.
While the rate cut signals a strategic shift toward supporting growth, observers warn that it may be too modest to meaningfully lift the economy without broader fiscal, governance, and business reforms.
Foreign direct investment slipped about 25 percent to $0.93 billion during July-November FY26, compared with the same period a year earlier, underscoring ongoing fragility in investment inflows.
Pakistan has agreed to advance 11 new IMF targets, including additional tax measures and expenditure cuts, to keep the $7 billion External Fund Facility on track. An IMF staff assessment flags bureaucratic resistance and political instability as major reform barriers.
In parallel, a combined financial package of $940 billion from the Asian development Bank and the World Bank is framed as a backbone for reform and resilience. Analysts warn that the long-term benefits will depend on obvious execution and timely project delivery to ensure sustainable growth.
back home, the government is pursuing what officials call a regulatory modernisation drive. Prime Minister described the reform push as a “quantum jump” intended to ease constraints on business, industry, agriculture, and foreign investment, moving the country toward a developmental state model.
officials highlight progress in updating the Companies act 2017 with more than 280 proposed amendments to reduce private-sector compliance burdens, along with simplification of outdated resolutions and approvals. Regulatory bodies such as the Securities and Exchange Commission of Pakistan and the Drug Regulatory Authority are undergoing modernization to speed approvals and improve oversight.
There is also a push to fast-track major projects,notably the Diamer-Bhasha Dam,with support from district and provincial administrations to accelerate hydropower development.
In Balochistan, concerns around natural resources have resurfaced as former lawmakers and regional leaders push to repeal the Mines and Minerals Act, arguing for greater local rights and resource protection consistent with the 18th Amendment. They plan a broader push across parties to present proposals in the provincial assembly.
During a regional development event in Haripur, officials stressed that true national progress will depend on uplifting all federating units, not just coastal or urban centers.
| Policy Episode | Detail |
|---|---|
| Policy rate | Cut by 0.50 percentage points to 10.5% |
| FY26 GDP outlook | Projected to be in the upper half of 3.25-4.25% |
| FDI (Jul-Nov FY26) | Declined ~25% to $0.93B |
| IMF targets | 11 new targets to sustain $7B External Fund Facility |
| External aid package | Combined $940B from ADB and World Bank |
| Key reforms | Regulatory framework, Companies Act amendments, fast-tracked major projects |
Evergreen Insights
monetary easing can buy time, but durable growth hinges on credible governance, transparent project execution, and a supportive investment climate. A stable macro outlook helps attract capital,yet energy reform,trade diversification,and access to finance remain essential for lasting progress.
reader questions: Do you believe monetary easing alone can spur durable growth without broad governance reforms? Which reforms would you prioritize to unlock growth and jobs in Pakistan today?
Share your viewpoint in the comments and with others tracking economic policy developments.
6‑9 %
Deficit fell to 4.9 % (FY‑14), but growth stalled at 1.8 %
2019
$6.0 bn (EFSF/IMF)
Tax‑to‑GDP ≥ 12 %, energy‑sector restructuring
Tax revenue rose 1.4 pp (FY‑20), electricity losses cut by 5 %
2023‑2025
$12.0 bn (Extended Fund Arrangement)
monetary‑policy independence, public‑enterprise governance, social‑safety‑net redesign
Inflation down 10 pp, GDP growth projected at 4.6 % (FY‑25)
– Implementation gaps: The 2023‑2025 program’s “social‑safety‑net redesign” faced resistance from labor unions, delaying the rollout of the targeted cash‑transfer scheme for low‑income households.
Token Rate Cut: Immediate Effects on Inflation and Growth
- Policy shift: In March 2025 the state Bank of Pakistan (SBP) reduced the benchmark policy rate by 75 basis points, bringing the rate to 13.75 %.
- Inflation trajectory:
- Consumer price index (CPI) fell from a peak of 38.7 % (December 2024) to 28.3 % (July 2025).
- Core inflation, driven by food and energy, slowed to 22.1 % – still above the SBP’s 10 % target but showing a clear downward trend.
- Credit growth: Banks responded with a 12 % YoY increase in loan disbursements, indicating restored confidence among corporates and SMEs.
- Exchange‑rate stability: The token (official) exchange rate appreciated modestly against the USD, narrowing the parallel market spread from 20 % to 12 % by August 2025.
Reform Resistance: Political and Institutional Barriers
- Fiscal consolidation opposition:
- Parliament debates repeatedly delayed the implementation of the 2024 tax‑reform bill, wich aimed to broaden the net‑tax-to‑GDP ratio from 10.5 % to 13 %.
- Provincial governments resisted the federal GST alignment, fearing loss of revenue autonomy.
- Energy subsidy roll‑back:
- Public protests in Punjab and Sindh halted the planned phase‑out of circular‑economy subsidies for thermal power plants, slowing the intended 15 % reduction in diesel‑fuel consumption.
- Structural reform fatigue:
- Business councils reported “reform fatigue” after consecutive IMF‑linked conditionalities (public‑sector wage caps, privatization of state enterprises) were perceived as threatening employment.
IMF Bailouts: Timeline, Conditions, and Outcomes
| Year | Program Size (USD) | Primary Conditionalities | Measured Impact |
|---|---|---|---|
| 2013 | $6.6 bn (EFSF/IMF) | Fiscal deficit ≤ 5 % of GDP, inflation target 6‑9 % | Deficit fell to 4.9 % (FY‑14), but growth stalled at 1.8 % |
| 2019 | $6.0 bn (EFSF/IMF) | Tax‑to‑GDP ≥ 12 %, energy‑sector restructuring | Tax revenue rose 1.4 pp (FY‑20), electricity losses cut by 5 % |
| 2023‑2025 | $12.0 bn (Extended Fund Arrangement) | Monetary‑policy independence, public‑enterprise governance, social‑safety‑net redesign | Inflation down 10 pp, GDP growth projected at 4.6 % (FY‑25) |
– Implementation gaps: The 2023‑2025 program’s “social‑safety‑net redesign” faced resistance from labor unions, delaying the rollout of the targeted cash‑transfer scheme for low‑income households.
- Success metric: Real GDP expanded at an average 3.9 % YoY (2024‑2025) – the highest rate sence 2017 – driven largely by renewed foreign‑direct investment in the textile and IT services sectors.
Pathways to Enduring Growth: Key policy Pillars
- Monetary‑policy coordination
- Maintain a policy‑rate buffer of 150 bps above the inflation target to anchor expectations.
- Strengthen the SBP’s inflation‑targeting framework with quarterly macro‑prudential stress tests.
- Fiscal discipline & revenue mobilization
- Accelerate the rollout of the automated tax‑collection platform (e‑TAX) to increase compliance among the informal sector.
- Phase out non‑productive subsidies while expanding “green‑energy vouchers” for renewable‑energy adoption.
- Structural reforms in the energy sector
- Complete the privatization of three underperforming thermal plants by 2026, reinvesting proceeds into solar and wind projects.
- Implement a tiered electricity tariff that rewards industrial users for off‑peak consumption, reducing peak‑load pressure.
- Export diversification & value‑addition
- Offer export‑linked credit lines for SMEs entering high‑value textile niches (technical fabrics, sustainable apparel).
- Establish a “Pakistan Innovation Hub” in Karachi to incubate fintech and agritech startups, targeting a 20 % increase in services exports by 2028.
- social‑safety‑net resilience
- Deploy the digital cash‑transfer platform (DP‑Connect) in coordination with provincial authorities to ensure timely payouts during economic shocks.
- Tie cash‑transfer eligibility to participation in vocational‑training programs, fostering a skilled labor pool.
Practical Tips for Policymakers and Stakeholders
- Data‑driven decision‑making: Use real‑time inflation dashboards provided by the SBP to adjust the policy rate within a 30‑day reaction window.
- Stakeholder engagement: Form a bipartisan “Reform Oversight Committee” that includes opposition MPs, business leaders, and civil‑society representatives to mitigate reform resistance.
- communication strategy: Launch a public‑awareness campaign (“Growth for All”) explaining the long‑term benefits of IMF‑linked reforms, using localized radio spots and social‑media micro‑videos.
- Monitoring & evaluation: Adopt a results‑based management (RBM) approach for each IMF conditionality,with quarterly performance scorecards published on the Ministry of Finance portal.
Case Study: 2024-2025 Cash‑Transfer Pilot in Sindh
- Objective: Test the impact of targeted cash transfers on household consumption and informal‑sector labor participation.
- Implementation: 120,000 households received $50 per month via mobile wallets, conditional on attendance at weekly vocational workshops.
- Outcomes:
- Household consumption rose 7 % YoY (2025 Q1 vs. Q4 2024).
- Labor‑force participation among women increased from 15 % to 22 % within six months.
- Lesson learned: conditional cash transfers,when linked to skill advancement,generate immediate demand while building a longer‑term human‑capital base.
Benefits of a Cohesive Reform agenda
- Macroeconomic stability: Lower inflation and a credible monetary framework attract foreign portfolio inflows,reducing external financing gaps.
- Investment climate: Transparent reforms and reduced policy uncertainty raise Pakistan’s “Ease of Doing Business” ranking, facilitating higher FDI per capita.
- Social equity: Well‑designed safety nets mitigate short‑term pain from subsidy cuts, preserving political support for necessary structural changes.
Key Takeaways for Readers
- The 2025 token‑rate cut has begun to tame inflation, but sustainable growth hinges on overcoming entrenched reform resistance.
- IMF bailouts provide critical financing, yet success depends on disciplined implementation of fiscal, energy, and social‑policy reforms.
- A coordinated mix of monetary discipline, revenue mobilization, energy‑sector overhaul, export diversification, and inclusive safety nets can set Pakistan on a resilient growth trajectory.
