KARACHI, Jan 27 (APP): The Governor State Bank of Pakistan, Jameel Ahmed, Monday, announced that the Monetary Policy Committee cautiously decided to cut the policy rate by 100 basis points to 12 percent owing to continued downward trend in inflation and gradual improvement in high frequency economic indicators and current account.
The SBP Governor, addressing a press conference following the MPC meeting here at SBP building, also shared with the journalists well assessed growth expectations for the fiscal year 2024-25, that average yearly inflation will remain in the range of 5.5 to 7.5%, current account may achieve a fair balance, GDP Growth will range between 2.5 to 3.5%.
We are expecting a $5 billion increase in both remittances and exports and foreign reserves are expected to surge above the $13 billion by the end of year, he added.
A bulk of the debt has already been paid and repayable amount is manageable while external inflows are also expected in the FY25, Jameel Ahmed informed, adding that debt management liabilities of the country for FY25 were $26.1 billion, out of them $6.4 billion had already been paid and $7.3 billion been rolled over with expectations of further roll over of $5 billion.
He said that the balanced external account and $1.2 billion and current account surplus during the first half of the year helped in building foreign exchange reserves and the central bank also got opportunities of market intervention.
The agriculture sector, that remained a core dynamic of overall GDP growth in the previous fiscal year, may not replicate the same results this year with expected sharp deceleration in agriculture sector growth to 1.2 percent in Q1-FY25, from 8.1 percent in the same period last year but improved growth prospects in services and industry sectors will support the GDP growth in FY25.
The SBP governor is hopeful that overall growth level is comfortable and high frequency economic indicators are showing positive signs and industrial growth while a 10% policy rate cut within a year will surely stimulate economic growth.
Responding to a query Jameel Ahmed said that effective measures have been taken in lieu of Islamic Banking and the central bank is also working on Governance, Audit, Product development in close coordination with market players.
The monetary policy committee, earlier in its meeting, reviewed current developments and noted that inflation continued to
trend downward in line with expectations, reaching 4.1 percent y/y in December. This trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favorable base effects. Inflation is expected to come down further in January before inching up in the subsequent months.
The Committee, according to a SBP statement, noted that real GDP growth in Q1-FY25 turned out slightly lower than the MPC’s earlier expectations; the current account remained in surplus in December 2024, though the SBP’s FX reserves declined amidst low financial inflows and high debt repayments; despite a substantial increase in December, tax revenues remained below target in H1-FY25; global oil prices have exhibited heightened volatility over the past few weeks; and global economic policy environment has become more uncertain, prompting central banks to adopt a cautious approach.
Considering the developments and evolving risks, the MPC viewed that a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth. In this regard, the MPC assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5 to 7%.
Continuing momentum in economic activity is reflected by a notable increase in automobile, POL and fertilizer sales, as well as in import volumes, electricity generation and credit disbursement to the private sector. However, the provisional data of real GDP for Q1-FY25 showed a modest growth of 0.9 percent against 2.3 percent growth recorded in Q1-FY24.
This slowdown was primarily explained by the expected sharp deceleration in agriculture sector growth to 1.2 percent in Q1-FY25, from 8.1 percent in the same period last year. And, the latest available information for wheat crop, including satellite images, are also pointing towards a relatively modest output.
The MPC noted that The business confidence index has continued to show positive sentiments. Going forward, the MPC expects economic activity to gain further traction and real GDP growth to remain in the earlier projected range of 2.5 – 3.5 percent.
In the External Sector, driven by strong workers’ remittances and export earnings, the current account posted a surplus of $0.6 billion in December, bringing the cumulative surplus to $1.2 billion during H1-FY25. Exports maintained a strong momentum and at the same time import growth also showed broad-based acceleration on the back of higher volumes.
While the import bill outpaced export earnings, remittances inflows more than offset the widening trade deficit.
Based on these trends, particularly the robust workers’ remittances, the outlook for the current account balance has improved considerably and is now expected to remain between a surplus and a deficit of 0.5 percent of GDP in FY25, it said adding that net financial inflows, though tepid during H1-FY25, are expected to improve going forward as a sizable part of official debt repayments has already been made. Consequently, the improved current account outlook, along with the expected realization of planned financial inflows, is likely to increase the SBP’s FX reserves beyond $13 billion by June 2025.
The MPC reviewed that FBR revenues recorded around 26 percent increase during H1-FY25, and stressed on a steep acceleration in tax revenue growth to achieve the annual target.
The broad money (M2) growth decelerated further to 11.3%. The decline in M2 growth came primarily on account of a significant deceleration in the NDA growth. While the government’s borrowing from the banking system remained relatively contained and shifted to non-bank sources, banks’ credit to the private sector grew sharply, the committee observed.
This was mainly on account of the ongoing economic recovery, ease in financial conditions, and aggressive efforts by banks to meet the advances to deposit ratio (ADR) thresholds. These factors also had an impact on bank deposits, which have declined noticeably since the last MPC meeting; whereas some increase in currency in circulation was also noted during this period.
The MPC reviewed that Headline Inflation remained on its downward trajectory and eased to 4.1 percent y/y in December from 4.9 percent in November, mainly led by the downward adjustment in electricity tariffs; adequate supply of key food items leading to low level of food inflation; stability in exchange rate; and favorable base effect. Moreover, inflation expectations also remained volatile.
Based on these trends, the MPC reiterated its earlier assessment that the near-term inflation will remain volatile and is expected to increase close to the upper bound of the target range towards the end of FY25. On balance, the MPC expects headline inflation for FY25 to average between 5.5 to 7.5 percent. Going forward, the inflation outlook is subject to risks emanating from volatile global commodity prices, protectionist policies in major economies, timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, as well as any additional measures to meet the revenue target, the committee pointed out.