The State Bank of Pakistan (SBP) published its Monetary policy Statement on August 22, 2022. The Monetary policy Committee (MPC) decided to keep the policy rate unchanged at 15 percent for the next two months in order to cool down the economy and curb inflation.
1/5 At today’s meeting, the Monetary Policy Committee decided to maintain the policy rate at 15 percent. See https://t.co/rzvfGJyCqe
— SBP (@StateBank_Pak) August 22, 2022
According to the Monetary Policy Statement, “To cool the overheating economy and contain the current account deficit, the policy rate has been raised by a cumulative 800 basis points since last September, some temporary administrative steps have recently been taken to curtail imports, and strong fiscal consolidation is planned for FY23. These actions are expected to work their way through the system over the coming months.”
With recent inflation developments in line with expectations, domestic demand beginning to moderate and the external position showing some improvement, the MPC felt that it was prudent to take a pause at this stage. Looking ahead, the MPC intends to remain data-dependent, paying close attention to month-on-month inflation, inflation expectations, developments on the fiscal and external fronts, as well as global commodity prices and interest rate decisions by major central banks, said the SBP.
Since the last meeting, the MPC noted three key domestic developments.
First, headline inflation rose further to 24.9 percent in July, with core inflation also ticking up. The bank said that it was expected given the necessary reversal of the energy subsidy package. Effects of reversing the subsidy will continue to manifest in inflation out-turns throughout the rest of the fiscal year—as well as momentum in the prices of essential food items and exchange rate weakness last month.
Second, the trade balance fell sharply in July and the Rupee has reversed course during August, appreciating by around 10 percent on improved fundamentals and sentiment.
Third, the Board meeting on the on-going review under the IMF program will take place on August 29th and is expected to release a further tranche of $1.2 billion, as well as catalyzing financing from multilateral and bilateral lenders.
In addition, Pakistan has also successfully secured an additional $4 billion from friendly countries over and above its external financing needs in FY23. As a result, FX reserves will be further augmented through the course of the year, helping to reduce external vulnerability.
On balance, the SBP noted that some greater slowdown in global growth would not be as harmful to Pakistan as for most other emerging economies, given the relatively small share of exports and foreign private inflows in the economy.
As a result, both inflation and the current account deficit should fall as global commodity prices ease, while growth would not be as badly affected.
SBP highlighted that recent flooding caused by unusually heavy and prolonged monsoon rains creates downside risks for agricultural production, especially cotton and seasonal crops, and could weigh on growth this year. Looking ahead, the MPC continues to expect growth to moderate to 3-4 percent in FY23, on account of the tightening of fiscal and monetary policies. This will ease demand-side pressures on inflation and the current account and lay the ground for higher growth in future on a more sustainable basis.
The bank emphasized that for higher and more sustainable growth over the medium-term, structural reforms to decisively move Pakistan’s growth model away from consumption toward exports and investment are also urgently needed.
The trade deficit halved to $2.7bn in July, imports fell sharply by 36.6pc (month-on-month) and 10.4pc (year-on-year) while exports also declined by 22.7pc month-on-month, it added.
Through administrative measures imports declined and the rupee gained due to diminished uncertainty about the IMF programme but the administrative measures are not sustainable and will need to be eased in the coming months, said the SBP.
It will be critical that the envisaged fiscal consolidation in FY23 is delivered and that strong measures are taken to curtail energy imports. Such measures include early closure of markets, reduced electricity use by residential and commercial customers, and greater encouragement of work from home and car pooling, said the SBP.
With the expected completion of the upcoming IMF review and the additional assistance secured from friendly countries, FX reserves are projected to rise to around $16 billion during FY23.
To ensure this and to support the Rupee going forward, it will be important to contain the current account deficit to around 3 percent of GDP by moderating domestic demand and energy imports. In addition, it will be critical to keep the IMF program on-track by following through on the agreed fiscal tightening and structural reforms over the next 12 months.
Regarding inflows from friendly countries, SBP Acting Governor Dr. Murtaza Syed said Pakistan has arranged $4bn in financing from friendly countries.
He said, “Pakistan will get $2bn from Qatar, $1bn from Saudi Arabia under the umbrella of deferred oil facility and $1bn investments from the UAE in various sectors.”
Pakistan’s gross financing needs would be around $30bn for FY23 including the amount required for CAD and debt repayments. He said the offered financing against this is estimated at $37bn for FY23. The amount raised after Pakistan secured $4bn of financing from friendly countries.