The Economic Policy and Business Development (EPBD), economic think tank, has recommended an immediate reduction in the policy interest rate from the current 11 percent to 9 percent in order to support post-flood recovery of the agriculture and industrial sectors.
The think tank said Pakistan’s agriculture sector had been severely damaged by the recent floods, and industrial growth must now play a vital role in stabilizing the economy. “The government must decide whether it wants to run industries with competitive financing costs or continue with the current unsustainable borrowing costs,” EPBD added.
According to the EPBD, lowering the interest rate could save the government Rs3 trillion annually, funds that could instead be diverted to rehabilitation and reconstruction in flood-affected regions.
The report highlighted that reducing borrowing costs would help boost exports, create jobs, and allow industry to compensate for the losses incurred by the agricultural sector. It cautioned that maintaining the current high rates was stifling industrial growth.
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The think tank further recommended that in the second phase, the interest rate should be reduced further from 9 percent to 6 percent, warning that Pakistan now stood at a critical juncture.
The report noted that the floods has affected 60 percent of the rice crop, 35 percent of cotton, and 30 percent of sugarcane. Around 40 percent of the labor force had also been affected.
As a result, GDP growth is expected to slow down to 3.2 percent, while the trade deficit could widen by an additional $1.9 billion, the think tank estimated.
The EPBD stressed that keeping the policy rate unchanged at 11 percent in the wake of the floods would be “unbearable” for the economy, increasing financial distress and halting industrial progress.