KARACHI – The State Bank of Pakistan on Tuesday decided to maintain the policy rate at 22 per cent.
The Monetary Policy Committee (MPC) took the decision after taking into account the impact of the recent hike in gas prices on inflation and other key factors.
The Committee viewed that hike in gas prices may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce.
Further, the Committee assessed that the real interest rate continues to be positive on a 12-month forward looking basis and inflation is expected to remain on a downward path.
The MPC noted several key developments since its October meeting.
First, the successful completion of the staff level agreement of the first review under the IMF SBA program would unlock financial inflows and improve the SBP’s FX reserves.
Second, the quarterly GDP growth outcome for Q1-FY24 remained in line with the MPC’s expectation of a moderate economic recovery.
Third, recent consumer and business confidence surveys show improvement in sentiments.
Finally, core inflation is still at an elevated level and is coming down only gradually.
Taking stock of these developments, the Committee assessed that the current monetary policy stance is appropriate to achieve the inflation target of 5-7 percent by end-FY25. The Committee reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realization of planned external inflows.
The MPC viewed that the recovery in real GDP during FY24 is expected to remain moderate.
According to the first estimates, real GDP grew by 2.1 percent y/y in Q1-FY24, compared to 1.0 per cent in the same quarter last year.
As per earlier expectation, recovery in the agriculture sector was the major driver of this growth.
The manufacturing sector also recorded a moderate recovery, with growth in large-scale manufacturing becoming positive after contracting in the preceding four quarters.
Unlike the commodity producing sector, growth in the services sector remained subdued.
The MPC observed a significant improvement in the current account balance, as the deficit narrowed by 65.9 per cent y/y to $1.1 billion during Jul-Oct FY24.
While imports declined, exports inched up on the back of food items, especially rice.
Further, workers’ remittances also improved in October and November 2023 as compared to corresponding months last year, incentivized by SBP and government initiatives to transfer funds through formal channels, and normalization of the kerb premium.
However, tepid official inflows since July and ongoing debt repayments have led to a gradual decline in the SBP’s FX reserves.
In this regard, the Committee expected that the successful completion of the first review of the ongoing IMF program is likely to improve financial inflows as well as the FX reserves position.
The Committee noted that the improvement in fiscal indicators continued, as both tax and non-tax revenues have shown strong growth.
During Jul-Nov FY24, FBR tax collection grew by 29.6 per cent, while non-tax revenues also increased amidst substantial growth in petroleum development levy and transfer of sizable SBP profit.
Further, overall expenditures in Q1-FY24 were contained at last year’s levels. The MPC emphasized the importance of continuing the ongoing fiscal consolidation, preferably through broadening the tax base and restraints on non-essential expenditures, for achieving macroeconomic stability.
The MPC noted that the higher-than-expected increase in gas prices contributed 3.2 per centage points to the 29.2 per cent y/y inflation in November 2023.
Further, core inflation remained sticky at 21.5 percent during the month, only slightly lower from its peak of 22.7 per cent in May 2023.
Inflation expectation of both consumers and businesses, though improving in recent months, remain at an elevated level.
Nevertheless, barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favorable base effect.
