SBP raises interest rate by 0.5 percentage points to 12pc

KARACHI: The State Bank of Pakistan (SBP) has raised the interest rate by 50 basis points, from 11.5 per cent to 12 per cent, citing higher energy prices caused by the ongoing tensions in the Middle East.

Announcing the new monetary policy, SBP Governor Jameel Ahmad said the policy rate was decided by majority, with nine of the 10 members voting for the increase and one against.

It may be recalled that in April 2026 the rate was raised by one percentage point in view of higher global energy prices and risks to supply chains, after which the SBP kept it unchanged. This is the first time in about three years that the central bank has raised the interest rate.

In December 2025, the rate was cut suddenly by 0.5 percentage points. The central bank then kept it at 10.5 per cent in January and March. Since mid-2024, the SBP has cut the key interest rate by a total of 10.5 percentage points. In June 2023 the rate had reached a record 22 per cent. It was reduced gradually after inflation fell sharply from its highest level in several decades.

Inflation and oil prices

Justifying the change in the policy rate, the SBP governor said several factors had influenced the rate, including the situation in the Middle East and other regions, oil prices staying above $100 continuously, and wheat prices in the country. The decision to raise the rate followed.

He expressed concern that, because of high oil prices in the global market and their possible effects, it may take longer than earlier estimated to bring inflation to the target level. The current account position is also likely to be somewhat worse than in the last review because of higher imports.

According to him, inflation had earlier been expected to come close to the 7 per cent target by the first quarter of the next fiscal year. However, because global oil prices remain high and because of their secondary effects, the process may take longer.

According to the governor, core inflation has fallen over the past two to three months, but there is greater concern about the indirect effects of oil prices in the coming months. Consumers’ inflation expectations and forecasts by other economic experts have also been included in the policy review.

Remittances, exports and the economy

Jameel Ahmad said the SBP has raised its estimate of remittances for the current fiscal year from $44 billion to $45 billion. Pakistan received $10.9 billion in remittances in the first quarter of the fiscal year. He said a scheme launched by the Pakistan Banks’ Association and trends in overseas employment are expected to improve remittances further.

Exports are likely to be between $32.5 billion and $33 billion in the current fiscal year, compared with $30.8 billion last year. However, pressure from rising imports persists. Imports could reach about $71 billion this fiscal year, against about $64.5 billion last year.

He said higher imports could cancel out some of the benefit of improved remittances and exports. However, the current account deficit is likely to remain between zero and one per cent of gross domestic product (GDP) this fiscal year.

The governor said Pakistan’s revised economic growth rate for fiscal year 2026 was 3.7 per cent. Growth in the last quarter of the fiscal year fell to 2 per cent from the earlier estimate of 2.9 per cent, mainly because of the Middle East situation.

According to Jameel Ahmad, average growth in the first three quarters of the fiscal year was 4.2 per cent, and economic activity improved in every quarter. However, the slowdown in the last quarter lowered the growth rate for the whole year. At the start of fiscal year 2026, the SBP had estimated growth at between 3.75 and 4.75 per cent.

Figures for the first quarter of the current fiscal year have not yet been released. However, an initial assessment shows that the pace of growth has started to improve again. He expected growth in the first quarter to be better than in the last quarter of the previous fiscal year.

The SBP has kept its growth estimate for the current fiscal year between 3.5 and 4.5 per cent. He said agricultural output is expected to rise this year, with sugarcane, rice and maize production likely to improve. Cotton output, however, is below expectations.

Foreign exchange reserves

Briefing the media on foreign exchange reserves, Jameel Ahmad said the external account has improved greatly since 2022. In 2023, reserves had fallen to just $2.8 billion, equal to only two weeks of imports. Reserves now stand at $21.5 billion.

On foreign debt, he said it has risen only slightly over the past four years. He said that between 2015 and 2022, foreign debt was increasing by $6.5 billion every year. Over the past four years, the increase has come down to an average of $1 billion to $1.25 billion a year.

He claimed the quality of the reserves is much better, because they have been built by buying dollars from the market and not by taking more loans. He dismissed fears that reserves would fall after the import bill rose because of tensions in the region.

The governor assured that the build-up of reserves would continue. He expressed hope that reserves would rise from $21.5 billion to $23 billion by December, and be taken to $25 billion by June 2027. According to him, reserves now equal three months of the import bill, which meets the international standard.

According to the governor, Panda bonds and Eurobonds will also be a source of reserves, bringing in large sums.

Exports and exchange companies

Jameel Ahmad said the government and the SBP are focusing on exports as much as on remittances. The amount under the import finance scheme has been raised from Rs1 trillion to Rs1.5 trillion, while banks are providing export finance at above 4.5 per cent. Banks are giving export refinancing loans at 4.5 per cent. The long-term rate on these is only 2 per cent for the first two years, followed by a fixed rate of 5 per cent for the next eight years.

The government has also launched a performance-based scheme. An exporter who raises exports by up to 10 per cent over the previous year will get a government incentive of one per cent. For an increase of more than 10 per cent, the incentive will be two per cent.

Banks have launched the Pasban Remittance Scheme, under which prizes worth Rs16 billion will be given over one year. The first draw will be held in January 2027, with prizes worth Rs4 billion.

Speaking on brain drain, the governor said more than 900,000 workers went abroad in 2015. In recent years the number has been between about 840,000 and 890,000. Between 2023 and 2025, the trend of skilled and highly educated workers, including doctors and engineers, going abroad declined.

According to the governor, the reasons for the rise in remittances include encouragement to send money through banking channels, a narrowing of the gap between interbank and open market exchange rates, action against informal channels, and reforms in the exchange companies system.

He said there were 166 exchange companies or franchises in the country in 2022, of which about 16 are operating now. Twelve banks have launched their subsidiaries and two more are about to do so. After that, about 30 exchange companies will remain.

On exports, the governor said the global market is competitive. For example, rice had performed very well, but its price later halved in the global market. As a result, rice exports were close to last year’s level, but their value remained lower.

The governor expressed hope that exports would rise further this year compared with last year.