KARACHI: Pakistan stands to benefit from the recent 50 basis point reduction in US interest rates, which is anticipated to boost demand in key export markets like the US and Europe. The Federal Reserve’s decision to lower rates to a range of 4.75-5% marks the first monetary easing in four years, likely enhancing Pakistan’s textile exports to Western markets.
Financial experts have indicated that this rate cut will decrease global borrowing costs, making it easier for Pakistan to access international capital markets. The country is exploring the issuance of Eurobonds, Sukuk, and Panda bonds to address a $5 billion financing gap over the next three years, with some of the necessary funds already secured.
A Pakistan-based economist working for a Western firm, who spoke on condition of anonymity, noted that the Fed’s rate cut aims to stimulate the US economy and reduce unemployment. This could lead to higher earnings for Pakistani expatriates and lower mortgage payments, thereby supporting steady remittance flows back to Pakistan.
Muhammad Sohail, CEO of Topline Securities, stated that the rate cut might lower Pakistan’s external borrowing costs. He mentioned that access to the Eurobond market could provide relatively low-cost funding, contingent on the country’s credit rating. Recent upgrades by Fitch and Moody’s, which have shifted Pakistan’s outlook from stable to positive, have mitigated foreign debt default risks, although the external economy remains fragile. Shahid Ali Habib, CEO of Arif Habib Limited, echoed this perspective, suggesting that lower US rates could attract foreign investors to Pakistan’s markets, which currently offer higher returns. He noted that foreign investment reached $141 million in FY24, the highest level since FY14, and the Fed’s rate cut could further stimulate foreign investment and potentially uplift the stock market.
The anonymous economist also highlighted that anticipated further rate cuts by the US Federal Reserve in November could enhance foreign investment in Pakistan’s bonds and stock market. The European Central Bank (ECB) has similarly reduced its interest rate to 3.5%, which is expected to benefit Pakistani exporters, as Europe is one of Pakistan’s largest export markets. The expert explained that the European and Canadian central banks typically align their monetary policies with the US, suggesting that continued easing could further bolster exports to the West.
As the gap between bond yields in the US and Pakistan widens, the attractiveness of Pakistan’s rupee-denominated Treasury bills (T-bills) may rise for foreign investors. Pakistan’s central bank has cut its key policy rate by 450 basis points over the past three months to 17.5%, a figure significantly higher than US and European rates. According to Topline Securities, foreign investors have already infused $50 million into Pakistan’s local bond market.
The ongoing rate cut cycle in the West may also encourage the State Bank of Pakistan (SBP) to lower its policy rate further, fostering growth in the country’s import-driven economy. This will depend on the steady inflow of workers’ remittances, which currently average around $3 billion per month, along with continued improvements in export earnings.
