The State Bank of Pakistan (SBP) has maintained its key policy rate at a record high of 22% for the fifth consecutive time in the past nine months, signaling a cautious approach amidst ongoing negotiations with the International Monetary Fund (IMF) and potential inflationary pressures.

This decision comes in the backdrop of a noticeable decline in inflation since January 2024, although concerns persist regarding the high level of inflation and its susceptibility to risks. The SBP’s decision reflects a delicate balance between supporting economic recovery and managing inflationary pressures in the face of global uncertainties.

Pakistan’s consumer price index for December increased by 29.7 percent compared to the previous year, as reported by the country’s Bureau of Statistics on Monday. In 2023, Pakistan, with a population of 241 million, experienced its highest-ever inflation rates, leading to historic lows in its currency value. The situation escalated until a $3 billion IMF bailout intervened in July, averting an imminent sovereign default. In December, monthly inflation saw a 0.8 percent uptick from the preceding month.

The governor of the central bank announced that Pakistan’s inflation rate is expected to decrease to approximately 20-22 percent in the financial year of 2024. In its latest monetary policy statement for the next six weeks, the central bank stated that the monetary policy committee (MPC) took note of a noticeable decline in inflation starting from January 2024, aligning with previous expectations. However, despite the sharp deceleration in February, the committee highlighted that inflation remains at a high level, with its outlook susceptible to risks due to elevated inflation expectations.

The upward trend in international oil prices presents a risk of increasing imports for the country and adding imported inflation, particularly given tensions in the Red Sea region. The MPC observed that headline inflation saw a significant year-on-year decline, dropping from 28.3% in January to 23.1% in February.

The central bank also noted that recent data supports its earlier expectation of a moderate recovery in economic activity for FY24, with real GDP growth expected to remain within the range of 2% to 3%. Pakistan’s export sector has experienced a significant surge, with exports increasing by over $1.69 billion in the first eight months of the fiscal year.

Data from the Pakistan Bureau of Statistics reveals that total exports from July to February reached $20.36 billion, marking a noteworthy milestone for the country’s trade economy. A notable contributor to this export growth is the food sector, which witnessed an impressive 54% increase, reaching $4.96 billion. This surge is credited to heightened demand for Pakistani basmati rice, meat, fruits, vegetables, tobacco, and spices both domestically and internationally.

In February 2024 alone, food exports experienced a remarkable uptick of 35%, totaling $700 million, further demonstrating the sector’s strong performance. Furthermore, other key export commodities such as raw cotton, wheat, canvas shoes, fans, and transportation goods also saw increased demand, contributing to overall export expansion. Significant rises were also observed in the exports of jewelry, sugar, cement, tires, tubes, and jaggery products.

Additionally, the engineering goods and electrical goods sectors recorded growth in exports during the July to February period. However, the textile sector experienced a slight decline of 0.65%, with textile exports totaling $11 billion. Despite this decrease, the textile industry remains a significant player in Pakistan’s export landscape. In comparison, during the same period of the previous fiscal year, textile exports stood at $11.21 billion, indicating a marginal decline in the current fiscal year.

The monetary policy committee acknowledged several key developments since its last meeting in late January, including a moderate increase in economic activity driven by a rebound in agricultural output. Furthermore, the external current account balance has performed better than anticipated, helping to maintain foreign exchange (FX) reserves despite weak financial inflows.

While inflation expectations among businesses have steadily risen since December, those of consumers have also slightly increased in March. Globally, while the overall trend in commodity prices has remained stable, oil prices have risen, partly due to ongoing instability in the Red Sea region. Amidst uncertainty surrounding the inflation outlook, major central banks in both advanced and emerging economies have continued to adopt a cautious monetary policy stance in recent meetings. The decision to keep the policy rate unchanged underscores the SBP’s commitment to anchoring inflation expectations and stabilizing the economy. Despite the recent decline in inflation, the persistence of elevated inflation levels poses challenges to the central bank’s efforts to achieve price stability. The upward trajectory of international oil prices and geopolitical tensions in the Red Sea region add further complexity to the inflation outlook, necessitating a cautious monetary policy stance.

Moreover, the SBP’s acknowledgment of a moderate recovery in economic activity, driven by improvements in agricultural output, provides some optimism for the economy. However, uncertainties surrounding the global economic environment and inflationary pressures continue to pose risks to the economic outlook. Additionally, the SBP’s emphasis on maintaining foreign exchange reserves amidst weak financial inflows highlights the importance of prudent macroeconomic management in safeguarding external stability.

In conclusion, the SBP’s decision to maintain the policy rate unchanged reflects its commitment to balancing the objectives of supporting economic recovery and managing inflationary pressures. While the recent decline in inflation is a positive development, persistent risks and uncertainties underscore the need for vigilance and careful policy calibration. Going forward, the SBP will likely continue to closely monitor domestic and global developments to ensure a stable and sustainable economic trajectory.