SBP Maintains 12% Interest Rate Amid Geopolitical Tensions

The State Bank of Pakistan (SBP) is expected to maintain its key interest rate at 12% on Monday, according to a Reuters poll, a decision with significant tax implications for businesses navigating economic uncertainty. Our tax law firm advises clients to prepare for the fiscal impact of this policy stance amidst geopolitical tensions and inflationary pressures.

The Monetary Policy Committee, meeting after the Pahalgam attack in occupied Kashmir that killed 26 tourists, faces heightened risks, as Pakistan warns of India’s potential military response, per credible intelligence. This has widened the spread between Pakistan and U.S. debt by 200 basis points to 850 bps, increasing borrowing costs—a concern for businesses with foreign loans. Of 14 analysts polled, nine predict a rate hold, while three expect a 50 bps cut and two a 100 bps cut, reflecting uncertainty after the SBP’s 1,000 bps cut since June 2024 from 22%.

The SBP’s cautious approach, driven by persistent core inflation, a fluid trade picture, and an upcoming IMF review on May 9 for a $7 billion bailout and $1.3 billion climate loan, impacts tax planning. Inflation dropped to 0.7% in March 2025, with April projected at 1.5-2%, and the SBP forecasts 5.5-7.5% for FY 2024-25, per the Ministry of Finance. However, S&P Global’s Ahmad Mobeen notes the need for a wait-and-see approach, while Arif Habib’s Sana Tawfik suggests a measured cut could spur growth without destabilizing external accounts. Al Meezan’s Amreen Soorani emphasizes building foreign exchange reserves to $14 billion by June (from $10.5 billion) before easing, as current reserves cover less than two months of imports.

From a tax law perspective, the high interest rate increases finance costs for businesses, which may be deductible under Section 29 of the Income Tax Ordinance, but requires proper documentation to avoid Federal Board of Revenue (FBR) disallowances. The increased borrowing spread affects foreign loan repayments, potentially triggering withholding tax (WHT) at 15% on interest payments to non-residents under Section 6, as well as exchange loss adjustments in taxable income. Clients must also prepare for IMF-driven tax reforms, as posts on X highlight Pakistan’s tax policy shifts under IMF pressure, which may raise compliance burdens.

Critically, the establishment narrative of “geopolitical tension” driving the rate hold may mask deeper structural issues—web sources like Dawn note Pakistan’s chronic fiscal deficits and policy inconsistency, which deter investment beyond immediate crises. Clients should anticipate FBR scrutiny on expense deductions and foreign transactions.

Our firm advises clients to review finance costs, ensure WHT compliance on foreign payments, and prepare for FBR audits, navigating this volatile economic landscape.