KARACHI, November 04 2024: In the meeting, the Monetary Policy Committee (MPC) decided to reduce the policy rate by 250 basis points to 15 per cent, effective from November 5, 2024. The Committee observed a faster-than-expected decline in inflation, reaching close to the medium-term target in October. The tight monetary policy stance has been pivotal in sustaining the downward trend in inflation. Key factors contributing to this decline include a sharp drop in food inflation, favourable global oil prices, and the absence of expected adjustments in gas tariffs and PDL rates.
Economic Developments
Since the last meeting, several developments have implications for the macroeconomic outlook:
- IMF Program Approval: The IMF Board approved Pakistan’s new Extended Fund Facility (EFF), reducing uncertainty and enhancing prospects for external inflows.
- Improved Confidence: Surveys in October indicated improved consumer and business confidence, along with a decrease in inflation expectations.
- Market Trends: Substantial declines in secondary market yields on government securities and KIBOR were noted.
- Tax Collection: Tax revenues during the first four months of FY25 fell short of targets.
- Commodity Prices: While global oil prices remained volatile due to geopolitical tensions, prices of metals and agricultural products have seen notable increases.
Assessment of Monetary Policy
Given these developments, the Committee believes the current monetary policy stance is appropriate for achieving sustainable price stability within the target range of 5 – 7 per cent. This approach will support macroeconomic stability and foster sustainable economic growth.
Real Sector Performance
Recent data indicates a gradual recovery in economic activity. Initial estimates for major Kharif crops exceeded previous expectations, with higher-than-targeted rice and sugarcane production compensating for declines in maize and cotton. Industrial activity, particularly in the textile, food, and automobile sectors, has shown significant growth and is expected to continue gaining momentum.
External Sector Overview
The current account surplus was maintained for the second consecutive month in September 2024, reducing the cumulative deficit to $98 million for Q1-FY25. Robust workers’ remittances and increased exports helped contain the deficit despite rising imports. The first tranche under the IMF program contributed to an increase in the State Bank of Pakistan’s FX reserves to $11.2 billion by October 25, 2024.
Fiscal Sector Insights
In Q1-FY25, the fiscal and primary balances recorded surpluses of 1.4 per cent and 2.4 per cent of GDP, largely attributed to record SBP profits boosting non-tax revenues. However, the FBR’s tax collection was below target, indicating a need for significant growth to meet FY25 tax objectives. Lower interest payments have created fiscal space, but achieving the targeted primary balance remains challenging.
Money and Credit Conditions
As of October 25, broad money (M2) growth rose slightly to 15.2 per cent year-on-year, with significant changes in its composition. Net budgetary borrowing from the banking system decreased, while private sector credit increased. The government’s reduction in bank borrowing and initiation of buy-back operations have allowed banks to extend more credit to the private sector.
Inflation Trends
Since the last MPC meeting, inflation has eased significantly, nearing the medium-term target range. Headline inflation dropped to 6.9 per cent in September and 7.2 per cent in October from 9.6 in August 2024. Improved domestic supply of key food commodities and favourable global oil prices accelerated disinflation. The MPC expects average inflation for FY25 to be lower than the previous forecast of 11.5 – 13.5 per cent, although risks remain due to geopolitical tensions and potential food inflation pressures.
In summary, the MPC’s decisions reflect a cautious but optimistic outlook on Pakistan’s economic stability and growth, guided by recent improvements in inflation and external conditions.
