KARACHI: State Bank of Pakistan (SBP) Tuesday decided to maintain the policy rate at seven percent on backdrop of continued domestic recovery, rising consumer and business confidence and improved inflation outlook.
The monetary policy committee (MPC), in its meeting chaired by SBP Governor Dr Raza Baqir, noted that due to positive developments in economy and financial sectors, the growth was projected to rise from 3.9 percent in fiscal year (FY) 21 to four to five percent in the current year while average inflation to moderate to seven to nine percent from its recent higher out-turns, said a statement issued here.
The MPC also noted that food prices and core inflation had declined recently while consumer and business confidence had risen to multi-year highs and inflation expectations had fallen.
Imports were expected to grow on the back of the domestic recovery and rebound in global commodity prices, albeit more moderately than in FY21, it further observed.
It noted that the market-based flexible exchange rate system, resilience in remittances, an improving outlook for exports, and appropriate macroeconomic policy settings should help contain the current account deficit in a sustainable range of two to three percent of gross domestic product (GDP) in FY22.
Though availability of adequate external financing would improve the country’s foreign exchange reserves position the MPC felt that the uncertainty created by the on-going fourth Covid wave in Pakistan and the global spread of new variants warranted a continued emphasis on supporting the recovery through accommodative monetary policy.
The MPC anticipated that the monetary policy to remain accommodative in the near term and in case of demand-led pressures on inflation or vulnerabilities in the current account, it would be prudent to normalize monetary policy through a gradual reduction in the degree of accommodation for curtailing the inflation and supporting sustainable growth.
The MPC considered key trends and prospects in the real, external and fiscal sectors, and resulting outlook for monetary conditions and inflation.
Pakistan’s economic recovery continues, driven by industry—particularly large-scale manufacturing and construction—and services, the MPC was informed adding that several high-frequency indicators showed strong year-on-year growth including fast moving consumer goods sales, steel production, cement sales, petroleum oil lubricants sales, and electricity generation.
“In FY22, growth is expected to pick up further, supported by measures announced in the budget, accommodative monetary conditions, and disbursements under the SBP’s TERF facility for investment and other refinance facilities,” the MPC observed and added increased development spending and reduced regulatory duties and taxes on the import of raw materials and capital goods would directly benefit construction and allied industries, as well as export-oriented industries.
The committee also expected that agricultural growth to contribute favorably despite reported water shortages at the start of the sowing period of Kharif crops while the key downside risk to growth stems from the resurgence of Covid cases associated with new strains of the virus both globally and domestically, amid still-low vaccination rates.
The MPC was briefed that widening of current account deficit in the second half of FY21, reflected the pick-up in domestic activity as well as seasonality in import payments, higher global commodity prices, and vaccine imports.
In addition, imports of capital goods rose, reflecting the improvement in the investment outlook of the economy.
For FY21 as a whole, the MPC noted that Pakistan’s external position was at its strongest in several years as the current account deficit fell to only 0.6 percent of GDP, lowest CAD in 10 years, supported by all-time high exports and remittances.
The SBP’s foreign exchange reserves rose by $5.2 billion during FY21 to end at over $17 billion or around three months of imports, a 4½ year high. Moreover, the SBP’s net external reserve buffers (gross reserves less forward liabilities) had risen by $14.1 billion since the beginning of FY20.
Unlike several previous growth upturns in Pakistan, the current economic recovery would be accompanied by external stability, the committee noted anticipating that expected resilience in remittances and an improving outlook for exports, the current account deficit to converge toward a sustainable range of two to three percent of GDP in FY22. Imports in FY22 were expected to be more skewed toward machinery rather than consumption and distributed across different sectors.
With contained current account deficit and healthy commercial, official, portfolio and FDI inflows, it was expected that Pakistan’s external financing needs of around $20 billion to be more than fully met in FY22. As a result, foreign exchange reserves were projected to rise further.
Since September 2020, the SBP’s Roshan Digital Account initiative for Overseas Pakistanis had generated new financial inflows of $1.8 billion. In July, Pakistan successfully raised an additional $1 billion through a tap issuance of its Eurobond that fetched $2.5 billion in March.
“In August, Pakistan’s reserve buffers are expected to rise by another $2.8 billion through the IMF’s planned new global SDR allocation,“ it said.
The MPC noted that the market-based flexible exchange rate and improved outlook for domestic investment would help keep the balance of payments position sustainable in case of higher-than-expected oil prices or capital flight from emerging markets.
The MPC noted that if balance of payments pressures were to emerge, some normalization of monetary policy may also be needed, especially if demand-side pressures were at play.
The MPC hoped that FY22 budget would be broadly inflation-neutral as most tax rates had been left unchanged. Targeted decline in budget deficit and strong growth in tax and non-tax revenue would offset significant growth in development and non-interest current expenditure.
The MPC noted that financial conditions remained appropriately accommodative and private sector credit continued to recover while in FY22 it would grow broadly in line with nominal GDP.
The SBP stress-tests indicated that the banking sector should remain stable even under adverse scenarios, with system-wide NPLs contained and capital adequacy well above the domestic regulatory benchmark.
The committee was informed that year on year inflation fell from 11.1 percent in April to 9.7 percent in June while average inflation in FY21 was 8.9 percent. For the first time since January, food prices fell on a month-on-month basis in June, on the back of the government’s administrative measures and imports of wheat and sugar while despite the rise in global oil prices, downward adjustments in the PDL had helped limiting domestic pass-through.
“Headline inflation should begin to dissipate more visibly in the second half of the year when the February electricity tariff increase drops out of the base, converging to the five to seven percent target range over the medium term”, the committee noted.
The MPC saw resurgence in the pandemic domestically and globally as a key risk that could lower inflation while risks that could raise inflation included higher-than-expected global commodity prices, especially if those were coupled with upward adjustments in the PDL or domestic energy tariffs, as well as fiscal slippages that lead to stronger demand-side pressures through the year.
The MPC would continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and would be prepared to respond appropriately, as and when required.

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