Pakistan’s central bank has left its key policy rate unchanged at a record high of 22% for the seventh consecutive time, meeting market expectations. This decision comes ahead of the International Monetary Fund (IMF) executive board’s final approval for the release of the last tranche of $1.1 billion on Monday.
While the IMF has consistently advised the central bank to maintain a tight monetary policy, it has refrained from dictating a specific policy rate. The bank is expected to sustain the high policy rate as the government engages in negotiations for a new IMF loan package of $6-8 billion over three years, following the completion of the previous one in April 2024. The government aims to secure a staff-level agreement for the new programme by June-July 2024.
Despite a decrease in the inflation rate to a 20-month low of 20.7% in March, resulting in a positive real policy rate of 1.3% after several years, the central bank has chosen to maintain its tight monetary policy.
It is projected that the inflation rate will further decline to 17-18% in April 2024, elevating the real policy rate to a positive 4-5%. However, the central bank has highlighted that despite this slowdown, inflation remains elevated, providing rationale for maintaining the status quo.
Additionally, the ongoing Middle Eastern crisis holds the potential to escalate global energy prices, which could lead to a resurgence of imported inflation in Pakistan, counteracting recent efforts to decelerate inflation through tight monetary policy over the past three years.
In its monetary policy statement on Monday, the SBP stated, “the MPC (monetary policy committee) views that the level of inflation is still high. At the same time, global commodity prices appear to have bottomed out with resilient global growth. The recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook.” The bank projected that the inflation rate will remain in the range of 23-25% for the ongoing fiscal year 2023-24, as last revised in January 2024, gradually decelerating to the target range of 5-7% by September 2025.
It remains steadfast in its economic growth forecast of 2-3% for FY24, as per its July 2023 projection.
During the analysts’ briefing following the monetary policy announcement, SBP Governor Jameel Ahmad stated that the country is set to repay maturing foreign debt worth $1.8 billion in the remaining period of FY24, excluding rollovers.
According to Topline Research, citing post-analysts briefing by the SBP, the foreign exchange reserves (held by SBP) are expected to increase to $9 billion following the receipt of the last tranches in a few days. These reserves are projected to remain stable at this level until the end of June 2024, despite upcoming repayments of $1.8 billion. Since its last meeting in mid-March 2024, the MPC has noted several key developments. Firstly, data for the first half of FY24 suggests a moderate pace of economic recovery, led by a strong rebound in the agriculture sector.
Secondly, the current account recorded a sizable surplus in March 2024, which contributed to stabilising the SBP’s FX reserves despite significant debt repayments and weak financial inflows.
Thirdly, while inflation expectations among consumers rose slightly in April 2024, those for businesses declined. Finally, leading central banks, particularly in advanced economies, have adopted a cautious policy stance following a slowdown in the pace of disinflation in recent months. 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 2-3%. The agriculture sector remains the key driver, with robust 6.8% growth in the first half of FY24, supported by significant increases in rice, cotton, maize, and wheat harvests, according to the latest official estimates.
In the industrial sector, large-scale manufacturing reported a 0.5% decline in July-February FY24, compared to a 4% contraction recorded in the same period last year. Regarding the services sector, the Committee noted that growth in the first half of the year was slightly lower than expected, reflecting the impact of subdued demand. Based on relatively improved capacity utilisation and business sentiments, as well as a low base-effect from last year, the MPC expects value-addition from the manufacturing and services sectors to recover in the coming months.
In line with fiscal consolidation efforts, the primary surplus increased to 1.8% of GDP during July-January FY24 from 1.1% in the same period last year.
“The interest payments, however, have increased due to high debt levels and the government’s reliance on expensive domestic borrowing. As a result, the overall deficit increased to 2.6% of GDP during July-January FY24 from 2.3% in the same period last year. The MPC reiterated that the continuation of fiscal consolidation, particularly through broadening the tax base and reducing losses of public sector enterprises, is essential for price stability and durable economic growth.”
Conversely, private sector credit continues to show a broad-based deceleration.
Business reaction
President of the Karachi Chamber of Commerce and Industry (KCCI), Iftikhar Ahmed Sheikh, expressed surprise at SBP’s decision to maintain the monetary policy, as the business community expected a cut of 150 to 200 basis points due to the declining trend of inflation and signs of economic recovery. He cited predictions by the IMF and the World Bank of the country’s GDP expanding by 2% in FY24, according to a press statement on Monday.
He was of the view that the exceptionally high borrowing rate has inflicted significant economic losses, particularly affecting the cost of doing business and severely impacting the manufacturing sector.
“The finance minister recently hinted at a rate cut, and during our meeting with Prime Minister Shehbaz Sharif at CM House, we also requested consideration for a rate cut, which, unfortunately, has not been implemented for reasons best known to the central bank,” he added.
Published in The Express Tribune, April 30th, 2024.
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