KARACHI: The State Bank of Pakistan (SBP) announced on Tuesday that it has decided to maintain the policy rate at 13.25%. SBP Governor Dr. Raza Baqir conveyed this decision, which was made during the Monetary Policy Committee (MPC) meeting. The SBP emphasized that the outlook for inflation remains steady, prompting the committee to retain the current monetary policy stance.
In its official statement, the SBP highlighted that the inflation trajectory is influenced by contrasting factors. While food price shocks and potential utility price adjustments pose short-term risks, recent appreciation in the exchange rate, coupled with fiscal consolidation measures, are expected to moderate inflationary pressures over time. The SBP projects average inflation to remain between 11-12% for FY20, aiming to reduce it to a medium-term target of 5-7% over the next six to eight quarters.
Key Developments Shaping SBP’s Decision
The SBP considered significant economic developments since the last MPC meeting in November 2019. A marked reduction in the current account deficit, stability in the foreign exchange market, and improved business confidence based on the IBA-SBP survey were pivotal factors. These positive trends, alongside fiscal discipline under the IMF-supported program, bolstered the SBP’s confidence in the economic recovery.
The SBP noted that the real sector is showing mixed performance. While Kharif crops, except cotton, met expectations, cotton production faced setbacks due to supply-side shocks. Additionally, Large Scale Manufacturing (LSM) growth remained uneven, with export-oriented industries like textiles and leather products performing better, whereas auto and food industries experienced declines. As a result, the SBP revised its FY20 GDP growth projection downward but remained optimistic about gradual recovery in the coming months.
External Sector Improvements
The SBP reported significant improvement in Pakistan’s external accounts. The current account deficit shrank by 75% during the first half of FY20, driven by reduced imports, increased export volumes, and higher remittances. Export growth was particularly notable in textiles, rice, and leather products, reflecting the benefits of the SBP’s market-based exchange rate system and incentive programs.
Foreign reserves also improved significantly, increasing from $7.28 billion in June 2019 to $11.73 billion by mid-January 2020, despite repayments of $1 billion for international Sukuk. The SBP credited this increase to sustained inflows of foreign direct investment and foreign portfolio investments, which strengthened the central bank’s net international reserves position.
Fiscal Consolidation and Inflation Outlook
The SBP underscored that fiscal consolidation remains critical for economic stability. Tax revenue collections rose by 16% in the first half of FY20, while development spending also increased significantly. This fiscal prudence supported a qualitative improvement in the inflation outlook, despite challenges such as high food prices.
The SBP acknowledged rising inflation, with CPI inflation reaching 12.6% in December 2019. However, it termed these pressures transitory, driven by supply-side shocks rather than structural issues. The SBP remains committed to anchoring inflation expectations and managing monetary policy to stabilize prices over the medium term.
The MPC concluded that the SBP’s current policy stance is appropriate to balance inflation management and economic growth, ensuring financial stability in the months ahead.