Karachi, December 16, 2024 – The State Bank of Pakistan (SBP) announced a significant cut of 200 basis points in its benchmark policy rate, bringing it down from 15% to 13%.
This decision, effective from December 17, 2024, was taken during the Monetary Policy Committee (MPC) meeting and reflects the central bank’s confidence in improving economic conditions and a notable decline in headline inflation.
The SBP highlighted that headline inflation eased to 4.9% year-on-year in November 2024, aligning with the MPC’s expectations. This decrease was primarily driven by declining food inflation and the fading impact of previous increases in gas tariffs. However, core inflation remains sticky at 9.7%, underscoring persistent inflationary pressures in certain segments. While consumer and business inflation expectations remain volatile, the SBP believes its measured rate cuts will help stabilize inflation within the target range of 5–7% over the medium term.
Key Developments and Policy Implications
The SBP noted several positive macroeconomic indicators influencing its decision. First, the current account has remained in surplus for three consecutive months, reaching $0.2 billion during July–October FY25. This surplus, driven by robust workers’ remittances and strong export performance, has contributed to building SBP’s foreign exchange (FX) reserves, which now stand at $12 billion. Second, global commodity prices have remained favorable, reducing inflationary pressures and supporting lower import costs.
The SBP also observed an increase in credit to the private sector, reflecting improved financial conditions and efforts by banks to meet the advances-to-deposit ratio (ADR) thresholds. However, a shortfall in tax revenues continues to pose challenges to fiscal consolidation efforts, emphasizing the need for fiscal reforms.
The cumulative reduction in the policy rate since June 2024, amounting to 400 basis points, is starting to yield results. The SBP expects the positive impact of these measures to materialize fully over the next few quarters, fostering sustainable economic growth while maintaining inflationary and external account stability.
Real Sector Gains
Economic activity in Pakistan is showing signs of revival, with the SBP reporting encouraging data from key sectors. Agriculture has benefited from better-than-expected cotton arrivals and promising wheat crop sowing. Industrial growth is also gaining momentum, with large-scale manufacturing sectors like textiles, food, automobiles, and petroleum products showing robust performance.
High-frequency indicators, including increased domestic sales of cement, fertilizer, and petroleum products, further underscore this positive trend. The SBP projects real GDP growth for FY25 to fall within the upper half of the 2.5–3.5% range, supported by improving business confidence and easing financial conditions.
External Sector Strength
The SBP’s data reflects ongoing improvement in the external sector. Workers’ remittances grew by 34% year-on-year during the first five months of FY25, totaling $14.77 billion. Exports also recorded an 8.7% increase, driven by high-value textile products, rice, and petroleum exports. Favorable global commodity prices have helped contain the import bill despite higher import volumes.
The narrowing gap between interbank and open market exchange rates and the SBP’s enabling policies have supported the currency market. The central bank expects its FX reserves to exceed $13 billion by June 2025, ensuring greater economic resilience.
Fiscal and Monetary Challenges
The SBP acknowledged improvements in fiscal performance during Q1-FY25, with a 23% year-on-year increase in Federal Board of Revenue (FBR) collections. However, this growth is insufficient to meet the annual tax target, necessitating additional fiscal measures. On the expenditure side, declining yields are expected to reduce interest payments on domestic debt, offering some fiscal relief.
Monetary developments have also been favorable, with broad money (M2) growth slowing to 13.9% in November. This deceleration reflects reduced government borrowing and increased private sector credit uptake. Consumer financing has also risen, supported by easing financial conditions.
Inflation Outlook
The SBP reported a further decline in headline inflation in November, driven by favorable base effects and subdued food inflation. Inflation is now projected to average well below the earlier forecast of 11.5–13.5% for FY25. However, the MPC noted risks from revenue-driven policy measures, potential food inflation spikes, and fluctuating global commodity prices.
Overall, the SBP reiterated its commitment to maintaining an appropriate monetary policy stance to support economic growth while ensuring inflation remains within the desired range.