Karachi, November 4, 2024 – The State Bank of Pakistan (SBP) projects significant fiscal savings following its recent policy rate cuts, estimating that total interest expenses for the fiscal year 2024-25 will decrease to Rs 8.5 trillion from the initially budgeted Rs 9.8 trillion.
This Rs 1.3 trillion reduction, approximately 1% of Pakistan’s GDP, is anticipated to ease the fiscal deficit for FY25, strengthening the government’s financial position amidst challenging economic conditions.
The SBP’s Monetary Policy Committee (MPC) announced its fourth consecutive rate cut, reducing the policy rate by 250 basis points to 15%. This latest adjustment brings the cumulative rate cut to 700 basis points from the peak rate of 22% seen in May-June 2024. The real interest rate now stands at 780 basis points, still higher than Pakistan’s historical average of 200-300 basis points, indicating a conservative stance despite the reductions.
In a press release and subsequent analyst briefing, Topline Securities highlighted key insights from the monetary policy announcement.
External Debt Repayment and Domestic Debt Management
The SBP emphasized that total external debt repayments for FY25 are expected to be around US$26.1 billion, slightly down from the previously estimated US$26.2 billion due to interest rate adjustments. Of this amount, approximately US$6.3 billion is due over the next eight months, with the remainder likely to be rolled over or refinanced.
Regarding domestic debt, the SBP reported a notable improvement in the maturity profile. Short-term securities accounted for around 24% of domestic debt as of June 2024; this figure has now declined to 21%, with projections to reduce it further below 20% by the end of FY25. This shift towards longer-term debt instruments aims to stabilize Pakistan’s debt structure and alleviate refinancing pressures.
Reserves, Funding, and Remittances
The SBP forecasts that foreign exchange reserves will surpass US$13 billion by June 2025. This outlook is bolstered by a forthcoming disbursement of US$500 million from the Asian Development Bank (ADB) within the next few weeks, which will push reserves above US$11.5 billion.
Remittance flows remain robust, with October remittances expected to reach or exceed US$3 billion, effectively narrowing the current account deficit to a negligible level. The SBP also assured that Pakistan’s funding requirements within the International Monetary Fund (IMF) program have been fully met, eliminating the risk of a funding gap.
Macroeconomic Indicators and Inflation Outlook
The SBP shared updated forecasts on key macroeconomic indicators, projecting a current account deficit of just 0-1% of GDP for FY25. Inflation is expected to average below the previous forecast range of 11.5-13.5%, with a more precise estimate anticipated in January 2025. Meanwhile, GDP growth remains projected at 2.5-3.5% for FY25.
Additionally, the SBP governor noted that current monetary policy settings have sufficient flexibility to absorb fluctuations of 10-15% in global oil and commodity prices, a critical buffer for maintaining stability amid volatile markets.
Impact on Key Sectors
The rate cuts are expected to benefit several high-leverage sectors, including cyclical industries and consumer discretionary companies. The textile sector, with significant leverage, is projected to see positive impacts on earnings between 8-12%, while steel and cement sectors could benefit by 7-9% and 5-7%, respectively. However, the banking sector may experience an 8-12% decline in earnings due to narrowing interest spreads, as evidenced by the 6-month Karachi Interbank Offered Rate (KIBOR), which fell to 13.33% in anticipation of the rate cuts.
With these strategic adjustments, the SBP aims to support economic recovery, stabilize fiscal performance, and create an environment conducive to growth across various sectors, positioning Pakistan for a more resilient economic future.
