Karachi, July 31, 2023 – The State Bank of Pakistan (SBP) has announced its decision to maintain the benchmark policy rate at 22 percent, citing a decrease in economic uncertainties.
The decision came following a meeting of the Monetary Policy Committee (MPC), which assessed the current economic situation and outlook.
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According to the SBP’s statement, the MPC noted a reduction in economic uncertainty since its last meeting. Additionally, near-term external sector challenges have been largely addressed, and investor confidence has shown improvement. While some upside risks to inflation have emerged, the committee also considered the expected lagged impact of the previous monetary tightening, budgeted fiscal consolidation, and the subdued growth outlook for FY24. Notably, the MPC expects year-on-year inflation to continue on a downward path over the next 12 months, which indicates a significant level of positive real interest rate.
Several recent developments have influenced the short-term macroeconomic outlook. Pakistan’s securing of a nine-month Stand-By Arrangement (SBA) with the IMF has helped address immediate external sector stability concerns by bolstering foreign exchange reserves. Moreover, an increase in electricity tariffs, global commodity price fluctuations, and a slightly improved global growth projection by the IMF have been considered by the MPC.
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Given these developments, the MPC emphasized the importance of maintaining an appropriately tight monetary policy stance with positive real interest rates to keep inflation and its expectations on a downward trajectory, aiming to achieve the medium-term inflation target of 5 – 7 percent by the end of FY25.
The latest high-frequency indicators up to June 2023 reveal weak economic activity, consistent with the provisional estimates of 0.3 percent real GDP growth in FY23, a sharp decline from the previous two years. Looking ahead, the MPC anticipates a moderate economic recovery in FY24, supported by a rebound in rice and cotton output, improved business confidence, and withdrawal of priority guidance on imports. However, the impact of monetary tightening and expected fiscal consolidation may continue to limit growth, with the projected real GDP growth for FY24 in the range of 2.0 to 3.0 percent.
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On the external front, the current account balance recorded a surplus for the fourth consecutive month in June, leading to a substantial narrowing of the cumulative current account deficit in FY23 to 0.7 percent of GDP from 4.7 percent in FY22. Looking ahead, the MPC expects the current account deficit to remain contained in the range of 0.5 to 1.5 percent of GDP in FY24, taking into account evolving domestic and global economic conditions.
The MPC also expressed concern over fiscal deficits exceeding revised estimates for FY23, emphasizing the importance of achieving fiscal consolidation in FY24 to maintain broader macroeconomic stability.
Regarding monetary trends, broad money (M2) growth increased to 14.4 percent in FY23 due to increased public sector borrowing, while private sector credit growth decelerated in line with the tight monetary policy and economic slowdown. The MPC expects moderate expansion in private sector credit this year, considering improved financing mix from external sources and some uptick in economic activity.
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Inflation has shown a considerable moderation from its peak in May 2023, and the MPC expects it to continue on a downward trajectory due to subdued domestic demand, tight monetary policy, favorable global commodity prices, and a positive base effect. The MPC projects average inflation in the range of 20 – 22 percent for FY24, down from 29.2 percent in FY23, with a gradual decline expected throughout the first half of FY24.
The MPC will closely monitor unfolding domestic and global developments and may recalibrate the monetary policy stance if required to achieve price stability and achieve the inflation target.
