Still in stabilisation mode

The State Bank of Pakistan’s (SBP) decision to raise the policy rate by 100 basis points to 11.5 per cent is an unmistakable signal: there is a clear preference for stability over economic growth; discipline over expansion. In a climate already weighed down by structural fragilities, monetary tightening has become the chosen instrument of restraint, especially since April inflation hit double digits for the first time in 21 months to clock in at 10.9pc. This stance is reinforced across the yield curve, with Treasury bill yields rising by up to 83 basis points in last week’s auction — signalling that short-term borrowing costs are being recalibrated upward in line with tighter monetary expectations. The immediate impact is felt where it always is — on borrowers and the stock market. Debt servicing costs are set to rise, cash flows are tightening, and financial space shrinks. The federal budget captures this pressure starkly: debt servicing now stands at Rs8.2 trillion, consuming 46.7pc of total federal expenditure for FY26. Nearly one rupee in every two is already committed to past obligations rather than future capacity. Besides, the KSE-100 index lost 4.5pc during the week ending April 30, partly due to the interest rate hike but largely because of the deepening Middle East conflict and a sharp increase in fuel oil prices following the closure of the Strait of Hormuz. High interest rates, rising T-bill yields, and external pressure are forcing fiscal discipline and more realistic planning Domestic debt repayments of Rs7.2tr alongside roughly Rs1tr in external dues earmarked for this fiscal year leave little fiscal space. Each rise in interest rates further compresses development spending, squeezing allocations for health, education, and infrastructure. The private sector is not insulated. Export-oriented industries, particularly textiles, operate on thin margins. A one percentage point rise in interest rates reduces profits by about 0.8 percentage points, according