Karachi, In its recent gathering, the Monetary Policy Committee (MPC) has decided to hold the policy rate at 22 percent. The Committee observed an anticipated rise in headline inflation for September 2023. However, it predicts a decline for October and a sustained decrease for the latter half of the fiscal year. Global oil prices’ volatility and the impending gas tariff increase are some of the factors impacting the FY24 outlook for inflation and the current account, though other factors offer balance.

According to State bank of Pakistan, among the critical developments since its September meeting are:

Positive initial estimates for Kharif crops, anticipated to bolster other primary economic sectors.

A significant narrowing of the current account deficit in August and September, stabilizing the SBP’s FX reserves in light of limited external financing.

Fiscal consolidation remaining consistent with improved fiscal and primary balances in Q1-FY24.

While core inflation persists, inflation expectations for both businesses and consumers have seen positive shifts, as per recent surveys. However, ongoing global oil price fluctuations and Middle East tensions cloud the future outlook.

Concerning real sector activity, the MPC highlighted:

Current data corroborates the MPC’s earlier predictions of moderate growth for the year. Key indicators like cement, POL, and auto sales reveal a steady recovery. Additionally, large-scale manufacturing (LSM) output has seen a gradual uptick in the year’s initial months, primarily from domestically-focused sectors.

On the external sector:

The MPC recognized a 58 percent y/y reduction in the current account deficit to $947 million in Jul-Sep FY24. Reforms initiated in early September to exchange companies and actions against illegal market activities have positively influenced FX market sentiments. SBP’s FX reserves stabilized around $7.5 billion as of October 20, in spite of subdued official inflows in August and September. The forthcoming IMF-SBA review’s successful completion is seen as pivotal for accessing other multilateral and bilateral financing options.

The fiscal quarter of Q1-FY24 reflected:

Fiscal indicators demonstrating improvement over the prior fiscal year’s first quarter. This progress stems from both heightened revenue collection and judicious spending. There’s a marked emphasis on the importance of ongoing fiscal diligence to maintain inflation’s downward momentum.

On the topics of money and credit:

A reduction in broad money (M2) growth to 12.9 percent by end-September from 14.2 percent at end-June 2023 was reported. This change is primarily attributed to a slowdown in private sector credit and a greater than usual retirement in commodity operations financing. The MPC emphasized the potential benefits of planned fiscal consolidation and the realization of projected external inflows for the private sector’s credit landscape and the NFA of the banking system.

Regarding the inflation outlook:

The MPC recorded a surge in headline inflation to 31.4 percent y/y in September but remains optimistic about its significant decline in October. Global oil prices and gas tariffs present potential risks to this inflation outlook. Although core inflation remains high, around 21 percent over the last four months, fiscal policy and food commodity availability are expected to support the central bank’s efforts in controlling inflation.