On Monday, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to hold the policy rate steady at 22% for the sixth consecutive meeting. This decision aligned with market expectations, as most analysts had anticipated a continuation of the current rate. The MPC noted inflation and the improvements in the external sector, attributing these positive changes to effective stabilization measures during the moderate economic recovery.
Despite these improvements, inflation levels remain high, posing ongoing concerns.
Global commodity prices are stabilizing, and global growth remains resilient. However, recent geopolitical developments add uncertainty to economic forecasts. Additionally, upcoming budgetary actions could influence near-term inflation trends.
The MPC is committed to reducing inflation to a target range of 5–7% by September 2025 and plans to maintain its current monetary stance to achieve this goal.
Real Sector Overview
Recent data confirms the MPC’s projections of moderate economic recovery, with real GDP growth expected to be between 2 and 3% for the fiscal year. The agricultural sector has been particularly strong, achieving 6.8% growth in the first half of FY24. This growth is driven by increased rice, cotton, maize, and wheat production.
The industrial sector, however, saw a slight decline of 0.5% from July to February in FY24. This marks an improvement over the 4% contraction experienced last year during the same period. Growth in the services sector was less than expected due to low demand.
The MPC expects the manufacturing and services sectors to improve in the coming months, supported by better capacity utilization and positive business sentiments.
External Sector Dynamics
The external sector shows a varied performance. In March 2024, the current account showed a substantial surplus of $619 million, exceeding expectations largely due to increased workers’ remittances during the Eid season.
From July to March in FY24, the current account deficit decreased by 87.5% to $0.5 billion compared to the previous year. This improvement results from growth in exports, particularly rice, and reduced imports, which stem from stronger domestic agricultural output and moderate economic activity.
The SBP has successfully made significant debt repayments, including a $1 billion Eurobond while keeping foreign exchange reserves at around $8 billion. The MPC emphasized the need to enhance foreign exchange reserves further to protect against external shocks and support sustained economic growth.
In conclusion, the MPC’s decision to maintain the current policy rate demonstrates the SBP’s dedication to ensuring economic stability amid shifting global and domestic conditions, aiming for long-term inflation targets and strengthening external buffers.
