Karachi : Dec 12 : The State Bank of Pakistan (SBP) kept on hitting adversely Pakistan ‘s interest by keeping the policy rate at 22 % till its next review probably in two months time .
The policy rate as high as 22 % is enough to devastate Pakistan’s economy . No business or industrial activity is possible when a country has 22 % policy rate.
The only beneficiary of 22 % policy rate are the banks which lend at around 27 % . This level of policy rate is just adding to Pakistan’s debt in hundreds of billions every month . It also serves to the banks to make windfall profit . The increase in the banks profits by 500 % in recent years is its ample proof. Pakistan will remain strangled in the banks clutches as long as SBP keeps maintaining interest rate at current devastating level.
The SBP handout apparently gave no logic to keep the policy rate at 22 % . The following is SBP handout on the policy rate. Think does it make any reason to ignore the demand of the business community for rationalising the policy rate to give a space to the business and industrial activity in Pakistan ?.
The handout said _At its meeting today, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22
percent. The decision does take into account the impact of the recent hike in gas prices on inflation in
November, which was relatively higher than the MPC’s earlier expectation. The Committee viewed that this
may have implications for the inflation outlook, albeit in the presence of some offsetting developments,
particularly the recent decrease in international oil prices and improved availability of agriculture produce.
Further, the Committee assessed that the real interest rate continues to be positive on a 12-month forward
looking basis and inflation is expected to remain on a downward path.
2. The MPC noted several key developments since its October meeting. First, the successful completion
of the staff level agreement of the first review under the IMF SBA program would unlock financial inflows
and improve the SBP’s FX reserves. Second, the quarterly GDP growth outcome for Q1-FY24 remained in
line with the MPC’s expectation of a moderate economic recovery. Third, recent consumer and business
confidence surveys show improvement in sentiments. Finally, core inflation is still at an elevated level and is
coming down only gradually.
3. Taking stock of these developments, the Committee assessed that the current monetary policy stance
is appropriate to achieve the inflation target of 5-7 percent by end-FY25. The Committee reiterated that this
assessment is also contingent upon continued targeted fiscal consolidation and timely realization of planned
external inflows.
Real sector
4. The MPC viewed that the recovery in real GDP during FY24 is expected to remain moderate.
According to the first estimates, real GDP grew by 2.1 percent y/y in Q1-FY24, compared to 1.0 percent in
the same quarter last year. As per earlier expectation, recovery in the agriculture sector was the major driver
of this growth. The manufacturing sector also recorded a moderate recovery, with growth in large-scale
manufacturing becoming positive after contracting in the preceding four quarters. Unlike the commodity
producing sector, growth in the services sector remained subdued.
External sector
5. The MPC observed a significant improvement in the current account balance, as the deficit narrowed
by 65.9 percent y/y to $1.1 billion during Jul-Oct FY24. While imports declined, exports inched up on the
back of food items, especially rice. Further, workers’ remittances also improved in October and November
2023 as compared to corresponding months last year, incentivized by SBP and government initiatives to
transfer funds through formal channels, and normalization of the kerb premium. However, tepid official
inflows since July and ongoing debt repayments have led to a gradual decline in the SBP’s FX reserves. In this
regard, the Committee expected that the successful completion of the first review of the ongoing IMF
program is likely to improve financial inflows as well as the FX reserves position.
Fiscal sector
6. The Committee noted that the improvement in fiscal indicators continued, as both tax and non-tax
revenues have shown strong growth. During Jul-Nov FY24, FBR tax collection grew by 29.6 percent, while
non-tax revenues also increased amidst substantial growth in petroleum development levy and transfer of sizable SBP profit. Further, overall expenditures in Q1-FY24 were contained at last year’s levels. The MPC
emphasized the importance of continuing the ongoing fiscal consolidation, preferably through broadening the
tax base and restraints on non-essential expenditures, for achieving macroeconomic stability.
Money and credit
7. The broad money (M2) growth decelerated to 13.7 percent y/y as of November 24, 2023 from 14.2
percent as of end-June. This deceleration is attributed to net retirements in private sector credit and more
than seasonal decline in commodity operations financing. Reserve money followed a similar trajectory,
slowing down from June, primarily due to a significant deceleration in currency in circulation. The Net
Foreign Assets of the SBP and the overall banking system have expanded since June due to considerable FX
inflows in July. This, along with the contraction in Net Domestic Assets since June, has improved the
compositional mix of broad money and reserve money.
Inflation outlook
8. The MPC noted that the higher-than-expected increase in gas prices contributed 3.2 percentage points
to the 29.2 percent y/y inflation in November 2023. Further, core inflation remained sticky at 21.5 percent
during the month, only slightly lower from its peak of 22.7 percent in May 2023. Inflation expectation of both
consumers and businesses, though improving in recent months, remain at an elevated level. Nevertheless,
barring further sizable increase in administered prices, the MPC continues to expect that headline inflation
will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply
constraints, moderation in international commodity prices and favorable base effect”.
