Interest rate cut to aid Pakistan’s debt servicing and contain fiscal deficit: SBP

Pakistan's debt servicing will see a significant reduction of nearly PKR 1300 billion, helping to contain the fiscal deficit by 1% of GDP. This follows the fourth consecutive rate cut by the State Bank of Pakistan (SBP).

SBP Governor Jameel Ahmed held an analyst meeting after announcing a 250 basis point rate cut, bringing the interest rate to a two-year low. This is the largest rate cut in the bank's history.

The rate cut, larger than anticipated, is based on economic fundamentals, including lower inflation.

For FY25, the total debt repayment requirement is $26.1 billion, comprising $22.1 billion in principal and $4 billion in interest. Of this amount, $5.7 billion has already been serviced, including a $2.3 billion rollover.

The remaining $20.4 billion will include a further $14.1 billion rollover, leaving $6.3 billion to be paid during FY25.

The IMF had identified a $2 billion gap, but arrangements have been made to cover it.

Ahmed also mentioned that $500 million from the Asian Development Bank (ADB) is expected this week or next, which would increase SBP's forex reserves to $11.7 billion. He expressed optimism about the economy's recovery, projecting SBP's forex reserves to reach $13 billion by the end of FY25.

Governor SBP noted that banks' advances to the private sector are increasing, a positive sign attributed to the government's reduced borrowing appetite and focus on long-term borrowing.

The Advance to Deposit Ratio (ADR) requirement of 50% has also driven increased private sector credit, as banks aim to meet this requirement to avoid additional taxes.

Ahmed announced that the central bank would transfer the Export Refinance Scheme (EFS) to EXIM Bank, with PKR 1.0 trillion available for exporters to borrow this fiscal year, including PKR 250 billion from EXIM Bank.

He reported that the country's overall debt stock was 75% of GDP in June 2023, now reduced to 67.4% of GDP. The total interest expense for FY25 is estimated at Rs8.5 trillion, down from Rs9.8 trillion in the Budget FY25.

This reduction in interest expense, nearly 1% of GDP, will help contain the fiscal deficit. Total interest payments, previously estimated at 60% of government tax revenue, are now expected to be less than 50%.