SBP Reduces Policy Rate to 11 Percent on May 5

The Monetary Policy Committee (MPC) of the State Bank of Pakistan has slashed the policy rate by 100 basis points to 11 percent on May 5, 2025, marking the fifth consecutive cut since June 2024 from 20.5 percent, a decision with significant tax implications for businesses. Our tax law firm advises clients to leverage this rate reduction while ensuring compliance with Federal Board of Revenue (FBR) regulations amidst shifting economic dynamics.

The SBP attributes the cut to a sharp decline in inflation during March and April 2025, driven by falling food and energy prices, with core inflation easing due to a favorable base effect. Economic activity is gaining traction, as shown by high-frequency indicators and consumer/business confidence surveys, with growth projected to accelerate next year, though global uncertainty poses downside risks. The MPC opts for a measured stance, maintaining a positive real policy rate to ensure price stability within the 5-7 percent inflation target, supporting sustainable growth.

From a tax law perspective, the lower policy rate reduces finance costs for businesses, which are deductible under Section 29 of the Income Tax Ordinance, potentially lowering taxable income, but requires meticulous documentation to avoid FBR disallowances. Reduced borrowing costs may spur capital investments, impacting depreciation claims under Section 22, while easing inflation could affect expense adjustments for VAT-registered entities, necessitating reconciliation with FBR to secure input tax credits. Clients must also monitor FBR audits, as economic growth may prompt stricter compliance checks, especially with IMF-driven reforms looming, as web sources like Dawn highlight Pakistan’s revenue pressures.

Critically, the narrative of “sustainable growth” may oversimplify challenges—web reports like The Express Tribune note Pakistan’s external vulnerabilities, such as a current account deficit, which could lead to future rate hikes and tax policy shifts, requiring proactive tax planning. Clients should prepare for volatility in this evolving landscape.

Our firm advises clients to optimize finance cost deductions, review depreciation schedules, and ensure FBR compliance, capitalizing on this monetary easing while bracing for potential audits.