Riaz Hussain
The State Bank of Pakistan has raised its policy rate by 0.50 percentage points to 12 percent, raising concerns about higher borrowing costs for businesses and a potential slowdown in industrial growth. According to the central bank, ongoing tensions in the Middle East, elevated energy prices and domestic wheat supply problems have increased the risks of higher inflation.
Nine out of 10 members of the State Bank’s Monetary Policy Committee supported the rate hike. The central bank said the decision was aimed at bringing inflation within its target range of 5 to 7 percent and containing the risk of further price increases.
However, economist Tahir Amin said inflation had not been effectively controlled despite tight monetary and fiscal policies, while high interest rates had further intensified difficulties for industry, investment and business activity.
According to Amin, higher interest rates increase borrowing costs, making it difficult for industries to expand production, adopt new technologies and grow their businesses. He said rising electricity, gas, water and labour costs had also increased Pakistan’s production expenses, making locally manufactured goods less competitive in international markets.
He pointed out that Pakistan’s exports had remained largely stagnant at around $30 billion annually for an extended period. According to him, expensive financing and rising production costs undermine the country’s ability to increase exports and compete with other countries in global markets.
Amin said small and medium-sized enterprises were particularly vulnerable to high borrowing costs because they depended on bank financing to expand production, replace machinery and introduce modern technologies. When loans become expensive and energy and other operating costs remain high, businesses are discouraged from investing.
He said the impact of the situation extended beyond industry to sectors such as construction and the purchase of vehicles and tractors. A slowdown in business activity could reduce employment opportunities and increase the risks of rising unemployment and poverty.
Questions Over the Strategy to Control Inflation
According to Amin, Pakistan’s strategy of controlling inflation through high interest rates has so far failed to deliver the desired results. He argued that when major drivers of inflation include energy prices and supply-side disruptions, raising interest rates alone cannot fully address the problem.
He said the government should focus on policies that reduce production costs, provide industries with affordable financing, increase exports and encourage private investment.
The State Bank, however, said rising global energy prices and other supply-side challenges had heightened inflationary pressures, making the rate increase necessary. According to the central bank, annual inflation stood at 10.3 percent in September 2026, above its medium-term target range of 5 to 7 percent.
Foreign Exchange Reserves and Economic Stability
The State Bank said the country’s foreign exchange reserves had remained stable at approximately $21.5 billion, sufficient to cover around three months of imports. However, external financial risks, fluctuations in global commodity prices and tighter international financial conditions continue to pose challenges to the economy.
Pakistan needs to maintain the value of its currency and external financial stability while also encouraging investment to support industrial development, boost exports and create employment opportunities.
The central question for economic policymakers is how to pursue a strategy that controls inflation while easing financial pressure on industries, promoting private investment and putting the national economy on a path towards sustainable growth.
Interest Rate Rises to 12%, Raising Concerns Over Industrial Growth and Investment
