The State Bank of Pakistan (SBP) has announced its decision to keep the benchmark policy rate unchanged at a record high of 22% for the next six weeks, as it projects a moderate economic growth range of 2-3% for the current fiscal year 2024.

SBP Governor Jameel Ahmad, speaking at a press conference on Monday, stated that the current tight monetary policy with the rate at 22% remains appropriate. With this, the inflation reading is expected to decelerate to 20-22% in FY24 from 29% in FY23, indicating a positive real policy rate on a 12-month forward-looking basis.

Later during an analyst briefing, the governor revealed that Pakistan is set to repay a net $8.5 billion in foreign debt during FY24, excluding rollover and interest payments worth another $16 billion throughout the year.

Speaking to The Express Tribune, Head of Research at Ismail Iqbal Securities, Fahad Rauf shared Ahmad’s estimation that inflows are estimated to be around $17 billion, double the outflows of $8.5 billion during the year. In addition to net debt repayment, Pakistan is also expected to make interest payments on foreign debt worth $3.3 billion during the year. The country is anticipated to record a current account deficit in the range of 0.5-1.5%, indicating that the growth in imports will remain moderate instead of aggressive.

Ahmad also mentioned that the International Monetary Fund (IMF) has recommended maintaining an aggressive monetary policy under the latest $3 billion loan programme but has not suggested an increase in the policy rate. He assured that the central bank is already maintaining an aggressive monetary policy.

The inflation forecast at 20-22% for FY24 already factors in the latest increase in power tariffs, a likely hike in gas tariffs, and external economic developments. As such, the policy rate will remain at 22% for now. Any unexpected changes will be considered in future monetary policy meetings.

The SBP governor further stated that commercial banks are now independent in financing imports and no longer require prior approval from the SBP. Importers can approach other banks if one bank does not extend the required financing for imports. At present, there are no restrictions on imports; all imports have been reopened, he said.

Regarding the rupee-dollar manipulation scandal in 2022, the SBP is still consulting with the government on whether to take regulatory or fiscal action against the involved commercial banks. He added that the imposition of tax on banks that booked windfall gains from the rupee-dollar exchange rate is still under discussion with the government.

With the government’s high dependence on domestic bank borrowing expected to decrease after acquiring the IMF’s $3 billion loan programme in late June, the SBP raised the key policy rate cumulatively by 8.25 percentage points to its all-time high of 22%.

Speculations suggest that the bank might consider increasing the policy rate if inflation reading accelerates during the interim government setup from mid-August.

Financial experts hope that the central bank will make the first cut in the policy rate sometime in the second half (Jan-Jun) of FY24.

Foreign debt repayment

In FY24, Pakistan’s foreign debt repayments will amount to slightly less than $24.5 billion, including principal repayment of around $21 billion and interest payments of $3.3 billion.

Out of the $21 billion principal payment, the SBP expects a rollover of around $11.3 billion. While $5.3 billion of rollover has already been agreed upon, another $6 billion is expected to be rolled over later during the year.

The remaining $10 billion will require repayment, with $1.5 billion already repaid in July 2023 and $8.5 billion still to be repaid.

The SBP’s monetary policy committee (MPC) noted during the meeting that the economic uncertainty has decreased since the last meeting held on June 26, 2023. Near-term external sector challenges have been largely addressed, and investor confidence has improved. However, some upside risks to the inflation outlook have emerged.

The MPC expects that economic activity will moderately recover in FY24, supported by a rebound in rice and cotton output. Improved business confidence and the withdrawal of priority guidance on imports have also improved the outlook for manufacturing, construction, and allied services.

Despite these improvements, the impact of accumulated monetary tightening and expected fiscal consolidation will continue to keep growth range-bound.

In FY23, growth declined to 0.3% compared to 6% in FY22.

The MPC anticipates that the current outlook for global commodity prices, along with moderate domestic economic recovery, will keep imports within a stable range. Prospects of multilateral and bilateral inflows have considerably improved after the IMF SBA, which is essential for building external buffers and meeting near-term external financing needs.

The market-determined exchange rate will continue to serve as the first line of defence against external shocks and support reserve build-up, noted the committee.

Published in The Express Tribune, August 1st, 2023.

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