The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) decided to maintain the policy rate at 22% during today’s meeting on Monday. The policy rate has remained unchanged for the past five meetings in a row.

The Monetary Policy Committee MPC’s decision aligns with market expectations, as the majority of market participants had anticipated a rate pause at this juncture.

HIGHLIGHTS

The Monetary Policy Committee MPC noted several key developments since its last meeting in December, which have implications for the economic outlook. These developments include:

  1. Improvement in FX Reserves: The SBP’s foreign exchange reserves have improved, thanks to a notable surplus in the current account in December and significant financial inflows, including the latest IMF SBA tranche.
  2. Fiscal Consolidation: Fiscal consolidation remains on track, with improvements in overall deficit and primary surplus. This is attributed to increased revenue collection and restrained expenditures.
  3. Positive Business Sentiments: Business sentiments, as reflected in recent surveys, have continued to improve, signaling optimism in the economic environment.

However, the Monetary Policy Committee also acknowledged the escalation of geopolitical tensions in the Red Sea region, which has led to a surge in global freight charges and poses risks for global trade and commodity prices.

REAL SECTOR

In terms of the real sector, incoming data supports the committee’s earlier assessment of a moderate economic recovery, primarily led by the agriculture sector. The real GDP growth projection remains in the range of 2% to 3% for fiscal year 2024.

EXTERNAL SECTOR

In the external sector, the current account surplus in December 2023 contributed to a significant reduction in the deficit for the first half of fiscal year 2024. Exports registered growth, supported by increased rice exports and higher value-added textile volumes. Import declines were attributed to lower international commodity prices, improved domestic crop output, and reduced oil import volumes.

Workers’ remittances also improved in December, contributing positively to the financial account, along with the receipt of the IMF-SBA tranche, which bolstered the SBP’s foreign exchange reserves (FOREX).

Fiscal consolidation remains essential for ensuring the sustainability of public debt and overall macroeconomic and price stability. The committee emphasized the importance of continuing with the tight monetary policy stance, along with fiscal consolidation and timely realization of planned external inflows, to achieve the inflation target of 5-7% by September 2025.

The broad money (M2) growth, which had been around 14% in fiscal year 2024, saw a temporary surge to 17.8% YoY by the end of December 2023. The Monetary Policy Committee MPC anticipates this acceleration to reverse in the coming months.

Due to tight monetary policy, fiscal restraint, declining global commodity prices, and increased domestic crop output, inflation—both food and core—has moderated recently. Significant changes in managed energy prices, however, have affected inflation, especially after November 2023.

The Monetary Policy Committee (MPC) anticipates that average inflation will therefore be between 23-25% in fiscal year 2024, with a discernible downward trend in fiscal year 2025. The MPC emphasises that in order to achieve long-term price stability, reforms addressing underlying structural issues are necessary, especially in the energy sector.

In conclusion, in an effort to guide Pakistan’s economy towards stability and growth, the SBP’s Monetary Policy Committee (MPC) has kept its policy rate at 22% while taking into account a variety of economic factors and developments.

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