Karachi: July 29, 2024:The State Bank of Pakistan (SBP) on Tuesday issued the new monetary policy and cut down the policy rate by 100 bps. SBP decision is indicative of its policy of protecting the interest of the banking sector.It said at its meeting the Monetary Policy Committee (MPC) decided to cut the policy rate by 100 basis
points to 19.5 percent, effective from July 30, 2024. The committee observed that the June 2024 inflation
was slightly better than anticipated. The Committee also assessed that the inflationary impact of the FY25
budgetary measures was broadly in line with earlier expectations. The external account has continued to
improve, as reflected by the build-up in SBP’s FX reserves despite substantial repayments of debt and other
obligations. Considering these developments – along with significantly positive real interest rate – the
Committee viewed that there was a room to further reduce the policy rate in a calibrated manner to support
economic activity, while keeping inflationary pressures in check.
2. The Committee noted the following key developments since its last meeting. First, the current account
deficit narrowed sharply in FY24 and SBP’s FX reserves improved significantly from $4.4 billion at end-June
2023 to above $9.0 billion. Second, the country reached a staff level agreement with the IMF for a 37-month
EFF program of about $7.0 billion. Third, sentiment surveys conducted in July showed a worsening in
inflation expectations and confidence of both consumers and businesses. Fourth, international oil prices have
remained volatile in recent weeks, whereas prices of metals and food items have eased. Lastly, with the ease in
inflationary pressures and labour market conditions, central banks in advanced economies have also started to
cut their policy rates.
3. Taking stock of these developments, the Committee assessed that, despite today’s decision, the
monetary policy stance remains adequately tight to guide inflation towards the medium-term target of 5 – 7
percent. This assessment is also contingent on achieving the targeted fiscal consolidation, timely realization of
planned external inflows and addressing underlying weaknesses in the economy through structural reforms.
Real Sector
4. Latest high-frequency indicators continue to reflect moderate economic activity. Auto and POL
(excluding FO) sales and fertilizer offtake increased on m/m basis in June. Large-scale manufacturing also
recorded a sharp improvement in May 2024, mainly driven by the apparel sector. The growth in agriculture
sector, after showing a strong performance in FY24, is expected to slow down in this fiscal year. Latest
satellite images and input conditions for Kharif crops also support this assessment. However, activity in the
industry and services sectors is expected to recover, supported by relatively lower interest rates and higher
budgeted development spending. Based on this, the MPC assessed FY25 real GDP growth in the range of 2.5
to 3.5 percent as compared to 2.4 percent recorded last year.
External Sector
5. After recording surpluses for three consecutive months, the current account posted a deficit in May
and June, in line with the MPC’s expectation. These deficits were largely due to higher dividend and profit
payments and a seasonal increase in imports, which more than offset a significant increase in exports and
workers’ remittances. Cumulatively, the current account deficit in FY24 narrowed significantly to 0.2 percent
of GDP from 1.0 percent in the preceding year. This, along with the revival of financial inflows, helped build
the SBP’s FX reserves. Looking ahead, the MPC expects a modest increase in imports, in line with the growth
outlook. At the same time, the continued robust growth in workers’ remittances, along with an increase in
exports, is expected to contain the current account deficit in the range of 0 – 1.0. percent of GDP in FY25. program, would help finance this current account deficit and further strengthen the FX buffers.
Fiscal Sector
6. The government’s revised estimates indicate improvement in fiscal balances during FY24, as the
primary balance turned into a surplus and the overall deficit declined from last year. However, amidst a
shortfall in budgeted external and non-bank financing, the government’s reliance on the domestic banking
system increased significantly. The Committee expressed concern on increasing reliance on banks for deficit
financing, which has been squeezing borrowing space for the private sector. For FY25, the government has
set the primary surplus target at 2.0 percent of GDP. The MPC emphasized on achieving the envisaged fiscal
consolidation and timely realization of planned external inflows to support overall macroeconomic stability,
and build fiscal and external buffers for the country to respond to future economic shocks.
Money and Credit
7. The MPC noted that the trends and composition of monetary aggregates during FY24 remained
consistent with the tight monetary policy stance. Broad money (M2) and reserve money grew by 16.0 percent
and 2.6 percent, respectively, well below the growth in nominal GDP. Almost the entire growth in M2 was
led by bank deposits, while currency in circulation remained almost at last year’s level. As a result, the
currency to deposit ratio improved, as it declined from 41.1 percent at end-June 2023 to 33.6 percent at endJune 2024. At the same time, the improvement in external account increased the contribution of net foreign
assets in monetary expansion. Meanwhile, the growth in net domestic assets of the banking system
decelerated amidst subdued demand for private sector credit. The Committee viewed these developments as
favorable for the inflation outlook.
Inflation Outlook
8. As expected, headline inflation rose to 12.6 percent y/y in June 2024 from 11.8 percent in May. This
increase was primarily driven by higher electricity tariffs and Eid-related increase in prices, which were partly
offset by the downward adjustments in domestic fuel prices. Core inflation, meanwhile, has steadied around
14 percent over the past two months. The MPC assessed that while the inflationary impact of the FY25
budget is largely in line with expectations, the available information indicates that the full impact of these
measures may now take some time to fully reflect in domestic prices. At the same time, the Committee noted
risks to the inflation outlook from fiscal slippages and ad-hoc decisions related to energy price adjustments.
On balance, after considering these trends – and accounting for the sufficiently tight monetary policy stance
and ongoing fiscal consolidation – average inflation is expected to remain in the range of 11.5 – 13.5 percent
in FY25, down significantly from 23.4 percent in FY24..
