In a move widely anticipated by market participants, the State Bank of Pakistan's Monetary Policy Committee (MPC) has opted to maintain the policy rate at 22%, marking the fourth consecutive meeting with no change.
The decision aligns with the prevailing market expectations and comes amid a complex economic landscape.
Despite the ongoing rate pause, the MPC acknowledges the impact of the recent surge in gas prices, contributing to higher-than-expected inflation in November.
The committee highlighted the need to consider various factors, including the offsetting effects of decreasing international oil prices and improved agriculture produce availability.
Positive outlook amid global, domestic developments
The MPC notes key developments since the October meeting, including the successful completion of the IMF SBA program's first review, quarterly GDP growth in line with expectations, and positive shifts in consumer and business confidence.
However, core inflation remains elevated, posing challenges to a swift economic recovery.
Real sector
The MPC anticipates a moderate recovery in real GDP during FY24, with Q1-FY24 growth reaching 2.15% YoY.
The agriculture sector drives this growth, while the manufacturing sector records a positive rebound. However, growth in the services sector remains subdued.
External sector
The MPC observes a notable improvement in the current account balance, with a 65.9% YoY reduction in the deficit to $1.1 billion during Jul-Oct FY24.
Despite challenges, exports see a slight uptick, fueled by food items, and remittances improve due to government initiatives.
Fiscal sector
The Committee highlights ongoing fiscal improvements, with strong growth in tax and non-tax revenues during Jul-Nov FY24.
FBR tax collection grows by 29.6%, while overall expenditures in Q1-FY24 are contained at last year's levels. The MPC underscores the importance of sustaining fiscal consolidation for macroeconomic stability.
Money and credit
The growth in broad money (M2) decelerates to 13.7% YoY as of November 24, 2023, attributed to net retirements in private sector credit.
The composition of broad money and reserve money improves due to FX inflows and a decline in Net Domestic Assets.
Inflation outlook
The MPC notes a 3.2 percentage point contribution from the increase in gas prices to the 29.2% YoY inflation in November 2023.
Core inflation remains sticky at 21.5%, with expectations of a significant decline in the second half of FY24, contingent on various economic factors.
As the State Bank of Pakistan maintains its policy stance, the nation navigates a dynamic economic landscape, balancing inflationary pressures with positive indicators and ongoing fiscal reforms.
