KARACHI: In line with the market expectations, the State Bank of Pakistan (SBP) on
Monday maintained its key interest rate at 22% for the seventh time in a row.
In its meeting today, the Monetary Policy Committee (MPC) noted that the
macroeconomic stabilisation measures are contributing to considerable
improvement in both inflation and external position, amidst moderate economic
recovery.
“However, the MPC viewed that the level of inflation is still high. At the same
time, global commodity prices appear to have bottomed out with resilient global
growth,” as per a statement issued following the meeting.
The MPC said recent geopolitical events have also added uncertainty about their
outlook. Moreover, the upcoming budgetary measures may have implications for
the near-term inflation outlook, it added.
On balance, the committee stressed on continuation of the current monetary
policy stance to bring inflation down to the target range of 5 to 7% by
September 2025.
‘Current account recorded sizable surplus’
The MPC said data for the first half of fiscal year 2024 suggested that economic
activity is recovering at a moderate pace, led by strong rebound in agriculture
sector.
Moreover, the current account recorded a sizable surplus in March 2024, which
helped to stabilise the SBP’s foreign exchange reserves despite substantial debt
repayments and weak financial inflows, as per the communique.
“Third, inflation expectations of consumers inched up in April 2024, whereas
those for businesses declined. And lastly, leading central banks particularly in
advanced economies have adopted cautious policy stance after noticing some
slowdown in the pace of disinflation in recent months.”
It further said that incoming data continues to support the MPC’s earlier
expectation of a moderate recovery in this fiscal year with real GDP growth
projected to remain in the range of 2 to 3%.
Agriculture sector remains the key driver with robust 6.8% growth in the first
half of FY24.
In the industrial sector, large-scale manufacturing reported a 0.5% decline in
July-February FY24 compared to 4.0% contraction recorded in the same period
last year while the services sector’s growth in the first half was slightly lower
than expected, reflecting the impact of subdued demand.
External sector
The current account has turned out better than expected, recording a sizable
surplus of $619 million in March 2024, mainly owing to the Eid-related surge in
workers’ remittances.
Cumulatively, the current account deficit narrowed by 87.5% to $0.5 billion
during July-March FY24 as compared to the same period last year.
“Exports continue to exhibit steady growth – led by rice – while imports have
decreased in the wake of better domestic agriculture output and moderate
economic activity.” said the MPC.
The reduction in the current account deficit — amidst weak financial inflows —
allowed SBP to make sizable debt repayments, including that of a $1 billion
Eurobond, while sustaining the SBP’s forex reserves around $8.0 billion, as per
the statement.
“The MPC emphasised that a further build-up in FX buffers is essential to
enhance the country’s ability to effectively respond to external shocks and
support sustainable economic growth.”
Inflation outlook
In line with the MPC’s expectations, inflation has continued to moderate
noticeably in the second half of the FY24.
It said headline inflation in March declined to 20.7% year-on-year from 23.1%
in February. In the same period, core inflation fell significantly to 15.7% from
18.1% in February.
Besides the coordinated tight monetary and fiscal policy response, other factors
that have led to this favorable outcome include lower global commodity prices,
improved food supplies and high base effect.
The MPC expected inflation to continue to remain on downward trajectory.
However, the MPC also noted that this inflation outlook is susceptible to risks
emanating from the recent global oil price volatility along with bottoming out of
other commodity prices; potential inflationary impact of resolution of circular
debt in the energy sector; and tax rate-driven fiscal consolidation going forward.
“Cognizant of these risks, the Committee assessed that it is prudent to continue
with the current monetary policy stance at this stage, with significant positive
real interest rates.”