Karachi (Web Desk/Agencies): The State Bank of Pakistan (SBP) on Tuesday decided to maintain the policy rate at 22 % while taking into account higher than expected impact of the recent gas price hike on inflation outlook.
655a8ad1e6e2456f93f3613fb56894beAccording to details, Monetary Policy Committee (MPC) in its meeting assessed that the real interest rate continues to be positive on a 12-month forward looking basis and inflation was expected to remain on a downward path, said a statement issued here.
The MPC viewed that hike in gas prices may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce.
The committee noted that the successful completion of the staff-level agreement of the first review under the IMF SBA program would unlock financial inflows and improve the SBP’s FX reserves.
The quarterly GDP growth outcome for the first quarter FY24 remained in line with the MPC’s expectation of a moderate economic recovery while recent consumer and business confidence surveys show improvement in sentiments, the committee observed adding that core inflation was still at an elevated level and was coming down only gradually.
Taking stock of the developments, the committee assessed the current monetary policy stance as appropriate to achieve the inflation target of 5-7 percent by end-FY25 and reiterated that this assessment was also contingent upon continued targeted fiscal consolidation and timely realization of planned external inflows.
The recovery in real GDP during FY24 is expected to remain moderate as real GDP grew by 2.1 % on year on year basis in Q1-FY24 in comparison to 1.0 percent in the same quarter last year, the MPC noted.
Recovery in the agriculture sector was the major driver of the growth while the manufacturing sector also recorded a moderate recovery, with growth in large-scale manufacturing becoming positive after contracting in the preceding four quarters, the committee viewed adding that, unlike the commodity-producing sector, growth in the services sector remained subdued.
The MPC observed a significant improvement in the current account balance, as the deficit narrowed by 65.9 % to $1.1 billion during Jul-Oct FY24.
With a decline in imports, the exports inched up on the back of food items, especially rice while workers’ remittances also improved in October and November 2023 as compared to corresponding months last year due to incentives by SBP and government initiatives to transfer funds through formal channels, and normalization of the kerb premium, it added.
However, tepid official inflows since July and ongoing debt repayments have led to a gradual decline in the SBP’s FX reserves, the Committee observed and hoped that the successful completion of the first review of the ongoing IMF program is likely to improve financial inflows as well as the FX reserves position.
Noting the continued improvement in fiscal indicators, with strong growth of both tax and non-tax revenues the committee observed that during Jul-Nov 2023-24, FBR tax collection grew by 29.6 % while non-tax revenues also increased amidst substantial growth in petroleum development levy and transfer of sizable SBP profit.
Appreciating the containment of overall expenditures in Q1-FY24 at last year’s levels, the MPC emphasized the importance of continuing the ongoing fiscal consolidation, preferably through broadening the tax base and restraints on non-essential expenditures, for achieving macroeconomic stability.
In the Money and credit sector the broad money (M2) growth decelerated to 13.7 % as of November 24, 2023 from 14.2 percent as of end-June owing to net retirements in private sector credit and more than seasonal decline in commodity operations financing, the MPC noted.
“Reserve money followed a similar trajectory, slowing down from June, primarily due to a significant deceleration in currency in circulation,” the committee stated adding that however the Net Foreign Assets of the SBP and the overall banking system have expanded since June due to considerable FX inflows in July.
This, along with the contraction in Net Domestic Assets since June, has improved the compositional mix of broad money and reserve money, it further added.
Reviewing the inflation outlook the MPC noted that the higher-than-expected increase in gas prices contributed 3.2 percentage points to the 29.2 percent year on year inflation in November 2023 while core inflation remained sticky at 21.5 % during the month, only slightly lower from its peak of 22.7 percent in May 2023.
Inflation expectation of both consumers and businesses, though improving in recent months, remain at an elevated level. Nevertheless, barring further sizable increases in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favourable base effect.
