SBP Maintains Policy Rate At 22% Owing To Global Uncertainties

Despite expectations of downward inflationary outlook in the coming months, the State Bank of Pakistan, Monday, cautiously decided to maintain the policy rate at 22 percent owing to recent volatility in global oil prices as well as the increase in gas tariffs

KARACHI, (UrduPoint / Pakistan Point News – 30th Oct, 2023) Despite expectations of downward inflationary outlook in the coming months, the State Bank of Pakistan, Monday, cautiously decided to maintain the policy rate at 22 percent owing to recent volatility in global oil prices as well as the increase in gas tariffs.

The Monetary Policy Committee of SBP, which met here to decide about the policy rate, noted that encouraging Kharif crop estimates, narrowing the current account deficit, stabilising foreign exchange reserves, improved fiscal and primary balance and downward inflation expectations were some positive developments, said a statement issued here.

The MPC expects inflation to decline significantly in October 2023 and onward, owing to downward adjustments in fuel prices, easing prices of some major food commodities, and a favorable base effect.

“However, global oil prices remain quite volatile and the conflict in the Middle East makes its outlook even more uncertain,” the MPC observed and emphasized on continuing with the tight monetary policy stance in the light of these developments.

The MPC also noted that targeted fiscal consolidation in the first quarter, improvement in market availability of key commodities and the alignment of interbank and open market exchange rates may offset the impacts of oil and gas price hike.

A successful and timely completion of the upcoming IMF-SBA review would help unlock other multilateral and bilateral financing, the committee ascertained.

Headline inflation that expectedly rose in September 2023 may decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year, the MPC noted adding that the recent volatility in global oil prices as well as the increase in gas tariffs from November 2023 pose some risks to the FY24 outlook for inflation and the current account.

The MPC termed initial estimates for Kharif crops as encouraging and said that those will have positive effects on other key sectors of the economy. It added that narrowing of current account deficit in August and September helped to stabilize the SBP’s FX reserves position around $7.5 billion as of October 20 amidst tepid external financing in these two months.

Fiscal consolidation remained on track, with both fiscal and primary balances improving during Q1-FY24 while core inflation remains sticky, inflation expectations of both consumers and businesses improved in the latest pulse surveys.

The MPC reiterated its earlier view that the real policy rate is significantly positive on 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5-7 percent by end-FY25 depending upon continued fiscal consolidation and timely realization of planned external inflows.

Recent data on economic activity reinforces the MPC’s earlier expectation of moderate growth for the current year particularly the latest production estimates of major Kharif crops show considerable increase compared to last year.

The improved crop output estimates were supported by higher fertilizer off-take and better availability of water while moderate recovery in other key activity indicators like cement, POL and auto sales was gaining traction, the MPC noted.

It added that large-scale manufacturing (LSM) output has indicated a gradual improvement in the first two months of this year, with major contributions coming from domestic-oriented sectors.

The MPC noted a substantial improvement in the current account balance, as the deficit narrowed over 58 percent y/y to $947 million in Jul-Sep FY24, while almost leveling out in September 2023. Besides both exports and workers’ remittances improved in September over the preceding two months.

The committee noted that the reforms related to exchange companies introduced in early September, coupled with administrative actions against illicit market activities, also helped improving FX market sentiments and liquidity.

In Q1-FY24, fiscal indicators improved compared to first quarter of the last fiscal year as fiscal deficit improved to 0.9 percent of GDP from 1.0 percent and the primary balance posted a surplus of 0.4 percent, compared with 0.2 percent last year.

The improvement reflected both better revenue collection and restrained spending as FBR’s revenue recorded 24.9 percent growth over the same period last year while non-tax revenues almost doubled mainly due to a sharp rate-driven increase in PDL collection.

Simultaneously total expenditures remained at last year’s level, supported by a considerable reduction in subsidies and grants, the MPC noted underscored that continued fiscal prudence and meeting the targeted fiscal consolidation was imperative for keeping inflation on downward trajectory.

The broad money (M2) growth decelerated to 12.9 percent as of end-September primarily due to continued slowdown in private sector credit and more than seasonal retirement in commodity operations financing while the reserve money growth has slowed down from June, which is primarily explained by significant deceleration in the growth of currency in circulation.

The MPC noted that since June, the Net Foreign Assets (NFA) of SBP and the banking system expanded owing mainly to significant FX inflows in July, while Net Domestic Assets (NDA) contracted, leading to an improvement in the composition of both M2 and reserve money.

The committee expected that the planned fiscal consolidation and realization of expected external inflows will create space for credit to private sector and also improve the NFA of the banking system.

The Committee noted that fiscal policy was also contributing to the overall stabilization measures, which, coupled with better availability of food commodities, was likely to supplement the central bank’s efforts to bring down inflation.


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