Think tank calls for 6% policy rate, end to Rs7.2tr in guaranteed bank returns
The Economic Policy and Business Development (EPBD), an independent policy research institute, has urged the government to shift fiscal priorities away from subsidising banks and toward supporting productive economic sectors. In a strongly worded statement, the think tank called for an end to guaranteed returns on government borrowing, proposing a reduction in the policy rate to 6% to redirect financial resources toward industrial growth and job creation.
The call came on the same day a federal cabinet committee criticised excessive banking subsidies under the Pakistan Remittances Initiative, revealing that banks had claimed Rs200 billion so far this fiscal year—Rs115 billion more than budgeted.
The EPBD stated that the current fiscal setup forces a choice between economic development and bank profitability, with the government allocating Rs7.2 trillion for domestic debt servicing — the bulk of the Rs8.2 trillion total debt service bill for FY2024-25, which accounts for 46% of the national budget. These payments largely benefit banks that hold government securities.
The think tank argued that the 11% policy rate — coupled with high-interest bonds issued during peak inflation — locks in unsustainable costs and diverts capital away from businesses. It suggested cutting the rate to 6%, in line with declining inflation, which could generate up to Rs3 trillion in savings. Even partial redirection of these funds could significantly lower business costs and stimulate industrial revival, SME growth, tech adoption, and exports.
It also criticised the government’s issuance of Rs2 trillion in Pakistan Investment Bonds (PIBs) at record-high 22% interest rates over the past two years, calling it a long-term burden that benefits banks while crowding out commercial lending.
“A 6% rate would still offer positive real returns to banks while easing the debt burden and enabling economic expansion,” the EPBD said. It noted that countries in the region have managed to maintain policy rates near 5.5%, limit debt servicing to 25% of their budgets, and achieve 6% GDP growth by supporting business development over financial sector profits.
The think tank pushed back on claims that lower interest rates widen the current account deficit. Citing the $19 billion deficit in FY2021-22, it attributed the gap to extraordinary imports such as $3.2 billion in vaccines, $15.6 billion in fuel, and $1.7 billion in smartphones — items unaffected by interest rate changes. High rates, it said, failed to curb imports but did suppress domestic growth.
EPBD also raised alarms over the banking sector’s retreat from private lending. With 97.3% of bank investments tied to government debt, banks are functioning more like bond traders than financial intermediaries. This has left manufacturers, exporters, and SMEs with limited access to credit, hampering business expansion, competitiveness, and job creation.
In its critique of the remittance support framework, the think tank highlighted that Rs87 billion had been paid to banks for basic money transfers — funds that could instead fuel entrepreneurship and SME development. The ECC is currently reviewing the future of these subsidies, which the finance ministry has proposed ending in FY2024-25 due to IMF restrictions and pressure from within the banking sector itself. The State Bank of Pakistan informed the ECC that such schemes, in place since 1985, have never been properly assessed for effectiveness.
A finance ministry official warned that without reform, the cost of remittance-linked subsidies could rise to Rs500 billion annually.
The EPBD concluded by emphasizing that businesses do not seek handouts — only fair access to capital. It urged policymakers to level the playing field by realigning monetary policy with national development goals. Reducing interest rates and reallocating funds currently spent on bank subsidies, the think tank argued, could unlock Pakistan’s economic potential, boost exports, and create sustainable employment.
