FeaturedNationalVOLUME 18 ISSUE # 37

Some respite on the horizon at last

The State Bank of Pakistan (SBP) has recently announced its decision to maintain the benchmark policy rate at a record high of 22% for the next six weeks. This decision comes as the central bank forecasts a moderate economic growth range of 2-3% for the current fiscal year 2024.

SBP Governor Jameel Ahmad affirmed that the current tight monetary policy remains appropriate, with the inflation rate expected to decelerate to 20-22% in FY24 from the previous 29% in FY23, indicating a positive real policy rate on a forward-looking basis. Let’s delve into the details of this report and the factors influencing the SBP’s decision.

The SBP governor stated that the current tight monetary policy with the rate at 22% remains appropriate. This decision is based on the projection of a moderate economic growth range and an expected deceleration of inflation to 20-22% in FY24 from 29% in FY23. The positive real policy rate on a forward-looking basis indicates the bank’s focus on curbing inflationary pressures.

Pakistan is set to repay a net $8.5 billion in foreign debt during FY24, excluding rollover and interest payments worth another $16 billion throughout the year. The country is expected to record a current account deficit in the range of 0.5-1.5%, indicating that import growth will remain moderate.

The International Monetary Fund (IMF) has recommended maintaining an aggressive monetary policy under the latest $3 billion loan programme, but it hasn’t suggested an increase in the policy rate. The SBP Governor assured that the central bank is already maintaining an aggressive monetary policy as per the IMF’s recommendations.

The SBP is still consulting with the government on whether to take regulatory or fiscal action against the involved commercial banks in the rupee-dollar manipulation scandal in 2022. The imposition of tax on banks that booked windfall gains from the rupee-dollar exchange rate is also under discussion.

The MPC expects economic activity to moderately recover in FY24, supported by a rebound in rice and cotton output, improved business confidence, and the withdrawal of priority guidance on imports. However, the impact of accumulated monetary tightening and expected fiscal consolidation will keep growth range-bound. The SBP’s monetary policy committee (MPC) noted that economic uncertainty has decreased since the last meeting held on June 26, 2023. Near-term external sector challenges have been mostly addressed, and investor confidence has improved. However, some upside risks to the inflation outlook have emerged.

The MPC expects economic activity to moderately recover in FY24, supported by a rebound in rice and cotton output. Improved business confidence and the withdrawal of priority guidance on imports have also contributed to a more positive outlook for manufacturing, construction, and allied services.

Despite these improvements, the impact of accumulated monetary tightening and expected fiscal consolidation will continue to keep growth range-bound. In FY23, growth declined to 0.3% compared to 6% in FY22. The MPC foresees that the current outlook for global commodity prices, coupled with moderate domestic economic recovery, will keep imports stable. The prospects of multilateral and bilateral inflows have significantly improved after the IMF SBA, which is vital for building external buffers and meeting near-term external financing needs. The market-determined exchange rate will continue to act as the primary line of defense against external shocks and support reserve build-up, as noted by the committee.

The inflation forecast for FY24 already factors in the latest increase in power tariffs, a likely hike in gas tariffs, and external economic developments. The market-determined exchange rate will continue to support reserve build-up and act as a defense against external shocks. There are speculations that the central bank might consider increasing the policy rate if inflation reading accelerates during the interim government setup from mid-August. Financial experts hope that the central bank will make the first cut in the policy rate sometime in the second half (Jan-Jun) of FY24.

Overall, the report highlights the SBP’s efforts to manage inflation and external debt while supporting economic growth. The decision to maintain a high policy rate indicates the bank’s commitment to control inflationary pressures in the economy, although there are hopes for future rate cuts depending on economic developments. However, uncertainties related to foreign debt repayments and the rupee-dollar manipulation scandal remain critical factors to be addressed in the coming months.

Despite economic uncertainties and inflationary pressures, the State Bank of Pakistan has chosen to maintain a record high policy rate of 22% for the near future. With projections of moderate economic growth and positive real policy rates, the SBP aims to address external challenges and investor confidence while ensuring a steady recovery in the manufacturing and allied sectors. The outlook for Pakistan’s foreign debt repayment and inflow-outflow balance also plays a crucial role in shaping the country’s monetary policy stance. As the global economic landscape evolves, the central bank remains watchful and prepared to make adjustments to foster stability and sustainable growth.

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