Finance Minister Aurangzeb is hopeful for an interest rate cut this year
Saad khan 
Islamabad: Finance Minister Muhammad Aurangzeb expressed hope on Wednesday that the State Bank of Pakistan (SBP) would cut its key policy rate this year in line with inflation.
Speaking at the Pak-China Business Forum in Shenzhen, Aurangzeb highlighted that the country's foreign exchange reserves had stabilized due to administrative measures and structural changes. He noted that inflation had slowed to just above 11%, beating the market consensus of 14%. While acknowledging that the policy rate decision lies with the central bank, he stated, "We expect that the policy rate will start moving down in line with inflation because we now have enough cushion in terms of the positive real interest rate that we need to maintain."
Aurangzeb also spoke about the country's "road-to-market" strategy, emphasizing three key aspects: export-led growth, foreign direct investment (FDI), and access to international capital markets. He stressed the importance of accessing the Chinese capital markets and mentioned that Pakistan was in the preparatory stages for its inaugural panda bond issue, following a structure similar to the one used by Egypt last year. Pakistan aims to raise $300 million in panda bonds once its credit rating improves.
Regarding the foreign reserves, Aurangzeb stated that the reserves stood at over $9 billion, close to covering two months of imports. He emphasized the importance of not just the quantum but also the quality of the foreign exchange reserves, noting that these reserves had not been built on the back of debt stock.
Meanwhile, a Reuters poll of market watchers found that the SBP is widely expected to cut its key interest rate next week by 100 basis points (bps) after holding it at a record 22% for seven straight policy meetings. The central bank's decision will come days before Pakistan's annual budget. The median estimate in the Reuters poll of 16 analysts predicts a 100 bps cut, with most analysts agreeing on this figure, while a few expect cuts ranging from 150 bps to 200 bps.
Economic activity in Pakistan has been slow for the last two years due to tough reforms under an International Monetary Fund (IMF) bailout aimed at stabilizing the economy. The GDP growth was expected to be 2% in the current financial year, which ends in June, and was negative in the previous year. The government targets 3.5% growth this year, anticipating an uptick in economic activity.
The government plans to approach the IMF for a new long-term bailout this summer after completing a short-term program earlier this year that helped avoid a default. The IMF had emphasized the importance of maintaining a tight monetary policy to control inflation, which remained above 20% since May 2022 and hit a record high of 38% last year. Inflation has since slowed, coming in below 20% in April and 11.8% in May.
Economic analyst Uzair Yonus commented, "Given the sustained decline in inflation and the SBP's prudence by not prematurely cutting rates, it now has the space to cut without risking things with the IMF." However, Fawad Basir, Head of Research at KTrade, noted that tax reforms being considered in the budget could have a far-reaching impact on the economy beyond inflation. He suggested that once these impacts are evident in high-frequency data and successful negotiations with the IMF are concluded, the SBP would be well-positioned to adopt a dovish stance, potentially aligning with the US Federal Reserve's strategy.
Over 100 businessmen and companies from Pakistan were part of the delegation at the Pak-China Business Forum, seeking business opportunities days ahead of the annual budget.
