ISLAMABAD   -  The Monetary Policy Committee (MPC) of the State Bank of Pakistan has decided to keep the policy rate unchanged at 22 percent.

In its meeting held on Monday, the Committee noted that the macroeconomic stabilization measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery. However, the MPC viewed that the level of inflation is still high. 

At the same time, global commodity prices appear to have bottomed out with resilient global growth. The recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the nearterm inflation outlook. On balance, the Committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5–7 percent by September 2025. 

Since its last meeting, the MPC noted following key developments. First, data for the first half of FY24 suggests that economic activity is recovering at a moderate pace, led by strong rebound in agriculture sector. Second, the current account recorded a sizable surplus in March 2024, which helped to stabilize the SBP’s FX reserves despite substantial debt repayments and weak financial inflows. Third, inflation expectations of consumers inched up in April 2024, whereas those for businesses declined. And lastly, leading central banks particularly in advanced economies have adopted cautious policy stance after noticing some slowdown in the pace of disin­flation in recent months. The in­coming data continues to support the MPC’s earlier expectation of a moderate recovery in this fiscal year with real GDP growth pro­jected to remain in the range of 2 to 3 percent. Agriculture sec­tor remains the key driver with robust 6.8 percent growth in H1-FY24. This outcome was support­ed by significant increase in rice, cotton, maize and wheat har­vests, according to the latest of­ficial estimates. In the industrial sector, large-scale manufacturing reported a 0.5 percent decline in July-February FY24 compared to 4.0 percent contraction record­ed in the same period last year. In the services sector, the Commit­tee noted that the growth in H1 was slightly lower than expect­ed, reflecting the impact of sub­dued demand. Based on relative­ly improved capacity utilization and business sentiments, as well as low base-effect from last year, the MPC expects value-addition from manufacturing and services sectors to recover in the coming months.

The current account has turned out better than expected, record­ing a sizable surplus of $619 mil­lion in March 2024, mainly ow­ing to the Eid-related surge in workers’ remittances. Cumula­tively, the current account defi­cit narrowed by 87.5 percent to $0.5 billion during July-March FY24 as compared to the same period last year. Exports contin­ue to exhibit steady growth – led by rice – while imports have de­creased in the wake of better do­mestic agriculture output and moderate economic activity. This reduction in the current account deficit – amidst weak financial inflows – allowed SBP to make sizable debt repayments, in­cluding that of a $1 billion Euro­bond, while sustaining the SBP’s FX reserves around $8.0 billion. The MPC emphasized that a fur­ther build-up in FX buffers is es­sential to enhance the country’s ability to effectively respond to external shocks and support sus­tainable economic growth.

In line with the fiscal consoli­dation efforts, the primary sur­plus increased to 1.8 percent of GDP during July-January FY24 from 1.1 percent in the same pe­riod last year. This improvement is mainly led by continuous in­crease in revenue collection and some restrain on non-interest expenditures. Sizeable increase in both tax and non-tax revenues largely reflects the impact of tax­ation measures and ongoing eco­nomic recovery. The interest pay­ments, however, have increased due to high debt levels and the government’s reliance on expen­sive domestic borrowing. As a re­sult, the overall deficit increased to 2.6 percent of GDP during Ju­ly-January FY24 from 2.3 percent in the same period last year. The MPC reiterated that continuation of fiscal consolidation, particu­larly through broadening the tax base and reducing losses of pub­lic sector enterprises, is essen­tial for price stability and durable economic growth.

The broad money (M2) growth increased to 17.1 percent y/y in March 2024 from 16.1 percent in February 2024. In the same pe­riod, reserve money growth in­creased to 10 percent from 8.2 percent. The increase in M2 was primarily attributed to expansion in net foreign assets on the back of improved FX reserves and in­creased net budgetary borrowing from commercial banks. On the other hand, private sector credit continues to show a broad-based deceleration. The MPC viewed that the recent growth in mone­tary aggregates is expected to de­celerate in the coming months, and this has already started to re­flect in the latest data. Moreover, the MPC viewed that the underly­ing compositional changes in M2 will have positive impact on the inflation outlook.

In line with the MPC’s expecta­tions, inflation has continued to moderate noticeably in H2-FY24. Headline inflation in March de­clined to 20.7 percent y/y from 23.1 percent in February. In the same period, core inflation fell significantly to 15.7 percent from 18.1 percent in February. Besides the coordinated tight monetary and fiscal policy response, oth­er factors that have led to this favorable outcome include low­er global commodity prices, im­proved food supplies and high base effect. The Committee views inflation to continue to remain on downward trajectory. How­ever, the Committee also noted that this inflation outlook is sus­ceptible to risks emanating from the recent global oil price volatil­ity along with bottoming out of other commodity prices; poten­tial inflationary impact of reso­lution of circular debt in the en­ergy sector; and tax rate-driven fiscal consolidation going for­ward. Cognizant of these risks, the Committee assessed that it is prudent to continue with the cur­rent monetary policy stance at this stage, with significant posi­tive real interest rates.