Karachi, December 12, 2023 – The State Bank of Pakistan (SBP) announced on Tuesday that it would maintain the benchmark policy rate at 22 percent for the fourth consecutive time.
The decision was made by the Monetary Policy Committee (MPC) in light of various economic factors affecting the country.
The central bank had previously increased the policy rate by 100 basis points to 22 percent during its meeting on June 26, 2023. Despite concerns about the impact of a recent hike in gas prices on inflation in November, which exceeded MPC’s earlier expectations, the Committee cited offsetting developments. These included the recent decrease in international oil prices and improved availability of agricultural produce.
The MPC highlighted that the real interest rate remains positive on a 12-month forward-looking basis, and inflation is expected to continue on a downward path. The Committee also noted several key developments since its October meeting, including the successful completion of the staff level agreement of the first review under the IMF SBA program, which is expected to unlock financial inflows and improve SBP’s foreign exchange reserves.
The quarterly GDP growth outcome for Q1-FY24 aligned with the MPC’s expectations of a moderate economic recovery. While the agriculture sector drove growth, the manufacturing sector recorded a moderate recovery, and the services sector growth remained subdued.
Regarding the external sector, the MPC observed a significant improvement in the current account balance, with the deficit narrowing by 65.9 percent year-on-year to $1.1 billion during Jul-Oct FY24. Import decline and export increase, particularly in food items like rice, contributed to this positive trend. Remittances also improved in October and November 2023, incentivized by SBP and government initiatives to transfer funds through formal channels.
However, the Committee acknowledged ongoing debt repayments and tepid official inflows, leading to a gradual decline in SBP’s foreign exchange reserves. The successful completion of the first review of the ongoing IMF program is anticipated to improve financial inflows and the FX reserves position.
Fiscal indicators showed continued improvement, with strong growth in both tax and non-tax revenues during Jul-Nov FY24. The MPC stressed the importance of ongoing fiscal consolidation, particularly through broadening the tax base and restraining non-essential expenditures, to achieve macroeconomic stability.
The MPC noted a deceleration in broad money (M2) growth and reserve money, attributing it to net retirements in private sector credit and a seasonal decline in commodity operations financing. Despite higher-than-expected gas price increases contributing to a 29.2 percent year-on-year inflation in November 2023, the MPC expects headline inflation to decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices, and a favorable base effect.
