Karachi, The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced today a reduction in the policy rate by 150 basis points to 20.5 percent, effective June 11, 2024. This decision was made in light of a significant decline in inflation since February, with May’s inflation figures surpassing expectations. The MPC observed that underlying inflationary pressures are easing due to a tight monetary policy and fiscal consolidation, reflected in continued moderation in core inflation and eased inflation expectations among consumers and businesses.
According to State Bank of Pakistan, key developments since the last MPC meeting include moderate real GDP growth at 2.4 percent in FY24, with industry and services showing subdued recovery and strong growth in agriculture. The reduction in the current account deficit has improved foreign exchange reserves to around $9 billion despite large debt repayments and weak official inflows. Pakistan has approached the IMF for an Extended Fund Facility program to unlock further financial inflows and bolster FX reserves. Additionally, international oil prices have declined while non-oil commodity prices have continued to rise.
Given these developments, the MPC deemed it appropriate to lower the policy rate. The real interest rate remains significantly positive, which is crucial for guiding inflation toward the medium-term target of 5-7 percent. Future monetary policy decisions will be data-driven and responsive to evolving inflation outlooks.
The real GDP growth estimate for Q3-FY24 is 2.1 percent, compared to a contraction of 1.1 percent in the same quarter last year. Agriculture has shown strong growth, and the industry has also seen positive growth. Revised estimates for Q1 and Q2 of FY24 indicate an upward trend, with FY24 growth provisionally estimated at 2.4 percent by the Pakistan Bureau of Statistics (PBS), compared to a contraction of 0.2 percent in FY23. The recovery is largely attributed to the agriculture sector.
The current account posted a surplus for the third consecutive month in April, driven by robust growth in remittances and exports, which offset the uptick in imports. During July-April FY24, the current account deficit narrowed significantly to $202 million, with exports growing by 10.6 percent and imports decreasing by 5.3 percent. Workers’ remittances reached an all-time high of $3.2 billion in May 2024. Improved FDI and the disbursement of an SBA tranche in April have facilitated debt repayments and supported FX reserves. The timely mobilization of financial inflows is essential to meet external financing requirements and strengthen FX buffers.
Fiscal indicators show improvement during July-March FY24, with the primary surplus increasing to 1.5 percent of GDP. The overall deficit remained stable due to higher tax and PDL rates, increased SBP profit, and lower energy sector subsidies. However, structural weaknesses in broadening the tax base and energy sector reforms need to be addressed. Fiscal consolidation through tax base broadening and reforming public sector enterprises is imperative for fiscal sustainability and to maintain inflation control.
Broad money (M2) growth decelerated to 15.2 percent year-on-year by May 24, 2024, from 17.1 percent at the end of March 2024, primarily due to the deceleration in the growth of net domestic assets. Net foreign assets continued to contribute positively to M2 growth. Deposits remained the mainstay in M2 growth, while currency in circulation growth decelerated. Reserve money growth declined steeply from 10.0 percent to 4.3 percent during the period, consistent with the tight monetary policy stance, which has favorable implications for the inflation outlook.
Headline inflation decelerated to 11.8 percent in May 2024 from 17.3 percent in April, driven by a decline in prices of wheat, wheat flour, and other major food items, along with a downward adjustment in administered energy prices. Core inflation also decelerated to 14.2 percent from 15.6 percent. However, the near-term inflation outlook faces risks from FY25 budgetary measures and future adjustments in electricity and gas tariffs. The MPC anticipates a potential rise in inflation in July 2024 before it trends down gradually during FY25. The current monetary policy stance is expected to keep inflation on a downward trajectory.