KARACHI, Jul 29 (APP): The State Bank of Pakistan, Monday, cut the policy rate by 100 basis points to 19.5 percent in wake of improved external account, surge in foreign exchange reserves and better than anticipated inflationary situation.
The Governor SBP, Jameel Ahmad, announced the decision of Monetary Policy Committee (MPC) here at a press conference along with Deputy Governor SBP Saleemullah and other officials at SBP building.
The newly announced policy rate will be effective from July 30, 2024 and MPC will review the situation and decide about policy rate in its next meeting scheduled in September this year.
Governor SBP said that the external account has continued to improve, as reflected by the build-up in SBP’s Foreign Exchange (FX) reserves despite substantial repayments of debt and other obligations, and June 2024 inflation was slightly better than anticipated while inflationary impact of the FY25 budgetary measures was broadly in line with earlier expectations.
Considering these developments, along with significantly positive real interest rate, the Committee viewed that there was a room to further reduce the policy rate in a calibrated manner to support economic activity, while keeping inflationary pressures in check, he maintained.
Jameel Ahmad said that real GDP growth in FY25 was expected to remain in the range of 2.5 to 3.5% as compared to 2.4% recorded last year, Current Account Deficit to remain in the range of 0 to 1% of GDP as compared to 0.2% in FY24 while annual inflation to further decrease by the end FY25 to a range between 11.5% to 13.5% in comparison to 23.4% of the previous year.
The central bank was taking steps to achieve the medium term inflation targets, he informed and expressed optimism that SBP will achieve the target of 5 to 7% inflation as tight Monetary stance by the central bank coupled with measures by the government started giving the required results.
The Governor noted that the current account deficit narrowed sharply in FY24 and SBP’s FX reserves improved significantly from $4.4 billion at end-June 2023 to above $9.0 billion while the country reached a staff level agreement with the IMF for a 37-month EFF program of about $7.0 billion.
Meanwhile, international oil prices have remained volatile in recent weeks and prices of metals and food items have eased while with the ease in inflationary pressures and labour market conditions, central banks in advanced economies have also started to cut their policy rates.
The Governor SBP responding to a query stated that Pakistan has made all the due payments of loans or managed their roll over on time in the previous year. “Our FX reserves are quality reserves and those were build up through well coordinated measures”, he said adding that the amount of serviceable loans was less than our reserves and debt servicing will not create any problem in the current Fiscal year.
Pakistan has to pay $26.2 billion in FY25 and out of them bilateral loans of over $16 billion were expected to be rolled over during the year, he informed adding that over $3 billion of loans were already paid back or got rolled over in July 24.
The MPC, according to a statement issued here, taken stock of recent developments and assessed that, despite the rate cut decision, the monetary policy stance remains adequately tight to guide inflation towards the medium-term target of 5 to 7% but it was also contingent on achieving the targeted fiscal consolidation, timely realization of planned external inflows and addressing underlying weaknesses in the economy through structural reforms.
The MPC noting moderate economic activity observed that Auto and POL (excluding FO) sales and fertilizer off take increased in June 24 while Large-scale manufacturing also recorded a sharp improvement in May 2024, mainly driven by the apparel sector.
The committee assessed that growth in agriculture sector, after showing a strong performance in FY24, was expected to slow down in the current fiscal year and it was also supported by the latest satellite images and input conditions for Kharif crops. However, activity in the industry and services sectors is expected to recover, supported by relatively lower interest rates and higher budgeted development spending.
In the External Sector, after recording surpluses for three consecutive months, the current account posted a deficit in May and June, largely due to higher dividend and profit payments and a seasonal increase in imports, which more than offset a significant increase in exports and workers’ remittances.
Cumulatively, the current account deficit in FY24 narrowed significantly to 0.2% of GDP from 1% in the preceding year. This, along with the revival of financial inflows, helped build the SBP’s FX reserves. Looking ahead, the MPC expected a modest increase in imports, in line with the growth outlook while the continued robust growth in workers’ remittances, along with an increase in exports, is expected to contain the current account deficit in the range of 0 to 1 % of GDP in FY25.
The Committee assessed that the expected financial inflows, including planned official flows under the IMF program, would help finance the current account deficit and further strengthen the FX buffers.
In the Fiscal Sector, the government’s revised estimates indicate improvement in fiscal balances during FY24, as the primary balance turned into a surplus and the overall deficit declined from last year.
On the government’s set primary surplus target at 2% of GDP for FY25, the MPC emphasized on achieving the envisaged fiscal consolidation and timely realization of planned external inflows to support overall macroeconomic stability, and build fiscal and external buffers for the country to respond to future economic shocks.
The MPC noted that the trends and composition of monetary aggregates during FY24 remained consistent with the tight monetary policy stance as Broad money (M2) and reserve money grew by 16% and 2.6%, respectively while currency to deposit ratio improved, as it declined from 41.1% at end-June 2023 to 33.6% at end-June 2024.
The improvement in external account increased the contribution of net foreign assets in monetary expansion while the growth in net domestic assets of the banking system decelerated amidst subdued demand for private sector credit, the Committee noted and viewed these developments as favorable for the inflation outlook.
Core inflation has steadied around 14% over the past two months while Headline inflation rose to 12.6% y/y in June 2024 from 11.8% in May, the MPC observed and assessed that while the inflationary impact of the FY25 budget is largely in line with expectations but the full impact of these measures may now take some time to fully reflect in domestic prices.