KARACHI, Jan 29 (APP): The State Bank of Pakistan (SBP) on Monday maintained the policy rate at 22 percent while emphasizing on continued tight monetary policy stance and fiscal consolidation.
The Monetary Policy Committee (MPC) took the decision in that regard keeping in view the pace of decline in inflation anticipated earlier had slowed down due to frequent and sizeable adjustments in administered energy prices which were also impeding a sustained decrease in inflation expectations, SBP Governor Jameel Ahmed told the press conference.
Though the non-energy inflation continued to moderate as per expectations while the real interest rate remained significantly positive on 12-month forward looking basis on expected downward trend of inflation, the escalated geopolitical tensions in the Red Sea region were posing risks for global trade and commodity prices as they had already led to a surge in global freight charges, he added.
The MPC noted several key developments since December which have implications for the economic outlook including improvement of foreign exchange reserves on the back of a notable surplus in the current account in December and significant financial inflows, including the latest IMF SBA tranche.
The SBP governor said that fiscal consolidation remained on track and complemented the MPC’s stance while business sentiments continued to improve as reflected in the recent surveys.
Taking stock of the developments as well as still-elevated levels of both headline and core inflation, the MPC emphasized on continuing with the tight monetary policy that along with continued fiscal consolidation and timely realization of planned external inflows would help to achieve the inflation target of 5-7 percent by September 2025, he noted.
Reviewing the real sector the MPC observed that real GDP growth projection remained unchanged in the range of 2 to 3 percent for FY24 as “incoming data continues to support its earlier assessment of moderate economic recovery, primarily led by the agriculture sector”.
Kharif crops’ output already turned out better than last year, the prospects for Rabi crops also appeared promising amid better input conditions.
The committee assessed that momentum in the industrial sector was expected to pick up from H2-FY24 as recent survey results showed consistent increase in capacity utilization in the manufacturing sector, while business sentiments- for both industry and services- turned positive for the first time since April 2022.
The committee observed that the Current Account surplus in December 2023 and significant decline in half yearly deficit, growth in exports and decline in imports, improved inflows of the workers’ remittances and increase in official inflows together with the receipt of IMF-SBA tranche, improved the SBP’s FX reserves to $8.3 billion as of 19th January, 2024.
It noted that the projection of current account deficit for FY24 remained unchanged in the range of 0.5 to 1.5 percent of GDP, despite the modest economic recovery and elevated level of profit and dividend repatriation.
The committee assessed that fiscal position continued to improve during Jul-Oct FY24 as overall deficit declined to 0.8 percent of GDP from 1.5 percent last year, while the primary surplus increased to 1.4 percent as compared to 0.2 percent last year.
“This improvement is mainly led by a significant increase in revenue collection and somewhat restrained expenditures,” the MPC stated, adding that FBR tax collection grew by 30.3 percent during H1-FY24 amid gradual recovery in economic activity and continued impact of taxation measures, while non-tax revenues also remained strong.
On the expenditure side, the decline in non-interest spending (as percentage of GDP) helped keep overall expenditures at contained levels, the MPC observed and noted that the continuation of fiscal consolidation was essential for ensuring sustainability of public debt as well as overall macroeconomic and price stability.
The MPC assessed broad money (M2) growth as temporary with likeliness to reverse in the coming months, and viewed that improvement in the external position had increased the net foreign assets of the banking system.
The committee noted that growth in net domestic assets of the banking system decelerated amid relatively low fixed investment loans and a net retirement in consumer loans, however, demand for working capital loans remained close to last year.
It also noted the continued declining trend in currency to deposit ratio, which was due to the strong growth in bank deposits and a decline in currency in circulation.
The MPC observed that both food and core inflation were moderating for the past few months reflecting positive impact of tight monetary policy stance duly supported by ongoing fiscal consolidation, lower global commodity prices, and improved domestic crop output and supplies.
“However, the positive impact of these developments is being diluted by sizable adjustments in administered energy prices, especially from November 2023 onwards,” the MPC noted, adding that the large adjustments had significantly impacted the inflation out turns and its near-term outlook.
The committee also emphasized on reforms to address underlying structural issues, especially those in the energy sector, to achieve price stability on a sustainable basis.
Incorporating the inflation in H1-FY24, expected significant decline in the second half, and the evolving risks, the MPC viewed that average inflation might fall in the range of 23 to 25 percent in FY24 and continue to trend down noticeably in FY25.
“The data suggests continuity of the agriculture sector led moderate economic recovery in fiscal year 2023-24 with the expectation of real GDP in the range of 2 to 3 %, average inflation to fall in the range of 23 -25 % while momentum in the industrial sector to pick up from the second half of FY2024,” the MPC noted.