ISLAMABAD: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday kept the key policy rate at 22 percent.
The committee, in its meeting, noted that headline inflation rose last month as expected. However, it is projected to decline this month and then maintain a downward trajectory, particularly in the second half of the current Fiscal Year. While the recent volatility in global oil prices, as well as the increase in gas tariffs from next month, pose some risks to the FY24 outlook for inflation and the current account, the committee also noted some offsetting factors. These include the targeted fiscal consolidation in Quarter 1, the alignment of interbank and open market exchange rates, and improvement in market availability of key commodities.
The committee noted some key developments since its September meeting. First, the initial estimates for Kharif crops are encouraging and will have positive effects on other key sectors of the economy. Second, the current account deficit narrowed significantly in August and September, which helped to stabilize the central bank’s FX reserves position amidst tepid external financing in these two months.
Third, fiscal consolidation remained on track, with both primary and fiscal balances improving during Quarter 1 of FY24. Fourth, while core inflation remains sticky, inflation expectations of both businesses and consumers improved in the latest pulse surveys. However, global oil rates remain quite volatile, and the conflict in the Middle East makes its outlook even more uncertain.
In light of these developments, the committee stressed continuing with the tight monetary policy stance. It reiterated its earlier view that the real policy rate is considerably positive on a twelve-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 to 7% by the end of FY25. However, it noted that this outlook is based on continued financial consolidation and timely realization of planned external inflows.
Moreover, recent data on economic activity reinforces the committee’s earlier expectation of moderate growth for the current year. In particular, the latest production estimates of major Kharif crops show a remarkable increase compared to last year. These improved crop output estimates are supported by better availability of water and higher fertilizer off-take. Also, moderate recovery in other key activity indicators like POL and auto sales, and cement is gaining traction. Furthermore, large-scale manufacturing output has indicated a gradual improvement in the first two months of the ongoing year, with major contributions coming from domestic-oriented sectors.
State Bank of Pakistan Notes Substantial Improvement in Current Account Balance
The committee also noted a substantial improvement in the current account balance, as the deficit narrowed over 58% on a year-on-year (YoY) basis to 947 million dollars in July to September FY24 while almost leveling out in September 2023. Both exports and workers’ remittances surged in September over the preceding two months.
The reforms related to exchange companies introduced in early September, coupled with administrative actions against illegal market activities, also helped improve forex reserves market sentiments and liquidity. The improved inflows in the interbank market helped stabilize the central bank’s FX reserves, around 7.5 billion dollars as of 20 October, amidst tepid official inflows during August and September. Nonetheless, the committee noted that a successful and timely completion of the upcoming IMF-SBA review would help unlock other bilateral and multilateral financing.
Moreover, in Q1-FY24, financial indicators improved compared to the first quarter of the last financial year. Specifically, the fiscal deficit improved to 0.9% of GDP from 1.0%, and the primary balance posted a surplus of 0.4%, compared with 0.2% last year. This improvement reflects both restrained spending and better revenue collection.
FBR’s revenue recorded 24.9% growth over the same period last year. Similarly, non-tax revenues nearly doubled, mainly due to a sharp rate-driven increase in PDL collection. At the same time, total expenditures remained at last year’s level, supported by a significant reduction in subsidies and grants. The committee noted that continued financial prudence and meeting the targeted fiscal consolidation is imperative for keeping inflation on a downward trajectory.
