KIBOR Falls After SBP Cuts Policy Rate to 11 Percent

Karachi Interbank Offered Rates (KIBOR) have plummeted following the State Bank of Pakistan (SBP)’s unexpected 100 basis point cut to the policy rate, now at 11%, a monetary easing signal with significant tax implications for businesses. Our tax law firm advises clients to capitalize on lower borrowing costs while ensuring compliance with Federal Board of Revenue (FBR) regulations in this shifting landscape.

Per Arif Habib Limited, KIBOR dropped across all tenors: one-week by 91bps to 11.43%, two-week by 87bps to 11.44%, one-month by 77bps to 11.47%, three-month by 75bps to 11.33%, six-month by 64bps to 11.44%, nine-month by 73bps to 11.53%, and one-year by 75bps to 11.51%, reflecting market confidence in the SBP’s inflation outlook. The Monetary Policy Committee (MPC) cited declining inflation in March and April, driven by lower electricity tariffs and food prices, with core inflation easing due to base effects. SBP Governor Jameel Ahmad noted stabilizing external sectors despite foreign exchange reserve pressures, while flagging global trade frictions as risks, per web sources like Dawn highlighting U.S. tariff tensions.

From a tax law perspective, reduced KIBOR lowers finance costs, which are deductible under Section 29 of the Income Tax Ordinance, potentially reducing taxable income, but requires meticulous documentation to avoid FBR disallowances. Lower borrowing costs may spur capital investments, impacting depreciation claims under Section 22, while foreign loan repayments could face withholding tax (WHT) at 15% on interest under Section 6, especially with exchange rate volatility. Credit growth may also trigger FBR audits, as revenue authorities monitor economic activity, per The Express Tribune reports on IMF-driven tax reforms.

Critically, the narrative of “improving macroeconomic indicators” may oversimplify external vulnerabilities—web sources note Pakistan’s chronic reserve shortages, suggesting future rate hikes or tax adjustments may follow. Clients must prepare for volatility.

Our firm advises clients to optimize finance cost deductions, ensure WHT compliance, and brace for FBR scrutiny, leveraging this monetary shift effectively.