Despite a significant drop in the interest rate, monetary expansion remained negative during the first seven months of the current fiscal year.
According to a report by Dawn News, monetary expansion refers to an increase in the money supply within an economy to promote growth. The State Bank of Pakistan (SBP) is in charge of the monetary policy and has reduced the interest rate by 1,000 basis points across six intervals since June 2024.
The report states that the successive interest rate cuts resulted in a large outflow of liquidity from banks to the private sector and non-bank financial institutions (NBFIs), but this has not managed to spur economic growth.
Bank loans to the private sector and NBFIs saw a sharp rise in the second quarter of FY25. Financial experts suggest that the impact of the increased liquidity on the private sector will take time to influence the economy, but the government remains cautious about fostering higher economic growth.
On the other hand, the government is concerned that a surge in growth may lead to inflation, higher imports, and a deficit in the current account, which is currently in surplus with $1.2 billion in the first half of FY25.
Recent data revealed that M2 growth (money supply) was negative Rs973 billion between July 1 and January 17 of FY25, compared to a net increase of Rs416 billion during the same period last year. The aim of expanding the money supply is to lower interest rates and borrowing costs, which should boost consumption and investment.
The M2 data indicates that broad money expanded by Rs4.94 trillion in FY24 and Rs4.17 trillion in FY23. This surge, mostly directed towards the government, led only to inflation, which peaked at a record high of 38% in May 2023. This inflationary pressure hindered economic growth, prompting the SBP to raise the interest rate to combat rising inflation.
The policy rate remained at an unprecedented 22% throughout FY24. The high cost of doing business discouraged the private sector from borrowing, with only Rs513 billion borrowed in FY24, compared to Rs46 billion in FY23.
