Karachi, September 12, 2024 – The State Bank of Pakistan (SBP) has announced a significant policy rate cut of 200 basis points (bps), bringing the rate down to 17.5%.
The decision, effective from September 13, 2024, was made by the Monetary Policy Committee (MPC) following a sharp decline in inflation over the past two months. The move signals confidence in easing inflationary pressures and a strategy to support the country’s fragile economy.
In its statement, the SBP emphasized that both headline and core inflation have reduced faster than expected, primarily due to delays in energy price hikes and favorable trends in global oil and food prices. Despite this progress, the MPC highlighted ongoing uncertainties, prompting a cautious approach to monetary policy. The Committee acknowledged that the tight monetary policy stance over the past year has been a crucial factor in driving inflation down.
Key Economic Developments
The MPC noted several important factors that influenced its decision. Global oil prices have fallen sharply but remain volatile. SBP’s foreign exchange (FX) reserves stand at approximately $9.5 billion as of September 6, 2024, despite weak foreign inflows and continued debt repayments. The yields on government securities in the secondary market have also declined significantly since the previous MPC meeting. Business confidence, as measured by pulse surveys, has improved, though consumer sentiment has weakened slightly.
The Federal Board of Revenue (FBR) tax collection during the first two months of the fiscal year (July-August 2024) fell short of the target, adding another layer of complexity to the macroeconomic outlook. Despite these challenges, the MPC expressed confidence that the real interest rate remains sufficiently positive to continue driving inflation down to the medium-term target of 5-7%, which would be critical for achieving sustainable economic growth.
Real Sector Performance
Recent data shows a modest recovery in economic activity, supported by increases in domestic cement and petroleum sales (excluding furnace oil) in August 2024. Business sentiment surveys also suggest that manufacturing firms have increased capacity utilization, reflecting a moderate pickup in production. However, the outlook for the agriculture sector remains weak, primarily due to an expected shortfall in cotton production, which is attributed to reduced cultivation area and lower-than-expected arrivals by the end of August.
Despite the challenges in agriculture, the easing of inflationary pressures and the impact of the recent policy rate cuts are expected to support growth in the industry and services sectors. The SBP’s outlook for real GDP growth remains unchanged at 2.5-3.5% for FY25.
External Sector Developments
Pakistan’s external sector showed some resilience in July 2024, with strong remittance inflows and improved export earnings helping to offset a rise in imports. As a result, the current account deficit was contained at $0.2 billion for the month. The positive trend in remittances continued in August, further stabilizing the external account. Global crude oil prices have softened, providing additional relief to Pakistan’s import bill.
The MPC noted that while imports are expected to rise as the economy recovers, the improving terms of trade due to lower oil prices should help keep the trade deficit manageable. Export earnings are also projected to remain stable, with growth in high-value-added textiles compensating for a likely decline in rice exports. The current account deficit is expected to stay within the projected range of 0-1% of GDP for FY25.
Fiscal and Inflation Outlook
The fiscal landscape continues to pose challenges, with the FBR’s tax collection for July-August growing by 20.5%, but still needing to accelerate to meet the fiscal year’s revenue targets. However, fiscal consolidation achieved in recent years has helped bring down inflation and restore macroeconomic stability. The public debt-to-GDP ratio improved significantly, declining from 75% in June 2023 to 67.2% in June 2024.
Headline inflation dropped to 9.6% in August 2024, down from 12.6% in June, while core inflation fell to 11.9%. However, risks remain, particularly concerning potential future adjustments in energy prices and global commodity price fluctuations. Despite these risks, the MPC expressed optimism that inflation for FY25 could fall below its earlier forecast of 11.5-13.5%, provided fiscal consolidation continues and external inflows materialize as planned.
The SBP’s decision to cut rates is a bold step aimed at fostering economic recovery while managing inflationary risks. The central bank’s cautious optimism signals a delicate balancing act between supporting growth and ensuring long-term stability.
