The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 22 percent.
The announcement was made by SBP Governor Jameel Ahmad in a press conference after the meeting of the Monetary Policy Committee (MPC) held today.
In the statement issued after the MPC meeting, the committee noted that the economic uncertainty has decreased since the last meeting, whereas near-term external sector challenges have been largely addressed and investor confidence has shown improvement.
While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation, and the tepid growth outlook for FY24. The MPC particularly noted that year-on-year (YoY) inflation is likely to remain on downward path over the next 12 months, which implies a significant level of positive real interest rate.
The statement noted that since the MPC meeting held on June 26, several important developments have influenced the short term macroeconomic outlook. First, Pakistan has secured a nine-month Stand-By Arrangement (SBA) with the IMF that has helped address immediate external sector stability concerns by supporting the foreign exchange reserves. With disbursement of the first tranche under the SBA and $3 billion in bilateral support, the SBP’s FX reserves increased from $4.5 billion at end June 2023 to $8.2 billion as of July 21, 2023.
Second, on top of the additional tax measures introduced at the time of approval of the budget, the government has notified an increase in electricity tariffs which would contribute to inflation in coming months. Third, the global commodity prices have somewhat increased but are still lower than their recent peak. Fourth, the IMF in its July 2023 World Economic Outlook has slightly raised its projection of global growth this year while leaving the 2024 growth projection unchanged.
In light of these developments, the MPC stressed on maintaining an appropriately tight monetary policy stance with positive real interest rates on forward looking basis to keep inflation and its expectation on downward path so as to achieve the medium-term inflation target of 5–7 percent by end-FY25, the statement added.
Real sector
Looking ahead, barring unforeseen events, the MPC expects economic activity to moderately recover in FY24, supported by a rebound in rice and cotton output. The committee further noted that improved business confidence and withdrawal of priority guidance on imports have improved the outlook for manufacturing, construction and allied services. Notwithstanding this improvement, the unfolding impact of accumulated monetary tightening and expected fiscal consolidation would continue to keep growth range bound. Taking these considerations into account, the real GDP growth is projected in the range of 2 to 3 percent for FY24.
External sector
Going forward, the current account deficit is expected to remain contained in the range of 0.5 to 1.5 percent of GDP in FY24. This assessment takes into account the impact of evolving domestic and global economic conditions. The MPC expects that current outlook for the global commodity prices along with moderate domestic economic recovery will keep the imports range-bound.
On the financing side, the prospects of multilateral and bilateral inflows have considerably improved after the IMF SBA. This is important in the context of building external buffers and meeting the near-term external financing needs. Further, the market-determined exchange rate will continue to serve as first line of defense against external shocks and support reserve build-up.
Inflation outlook
The MPC projects average inflation in the range of 20–22 percent in FY24, down from 29.2 percent in FY23. The MPC’s assessment shows inflation to fall gradually during the first half of FY24, before falling below 20 percent in the second half. This outlook, nevertheless, is subject to risks arising from domestic and external shocks such as adverse climate events, and global commodity price volatility. In this regard, the MPC will continue to carefully monitor the impact of unfolding domestic and global developments on the inflation outlook, and, if required, recalibrate the monetary policy stance to achieve price stability.
