ISLAMABAD: Standard & Poor’s Global Marketing Intelligence on Tuesday forecast multiple policy rate cuts for Pakistan in the current calendar year as headline inflation dropped to 6.9pc — the lowest in 44 months.

However, in its latest analysis of Pakistan’s economy, S&P Global warned that inflation could remain in the double digits during the current fiscal year, owing to IMF policy subscriptions adopted in the budget like higher taxes on agriculture, wholesale and retail sectors and further increase in gas and electricity rates.

It acknowledged Pakistan’s headline inflation easing to 6.9pc on a year-over-year basis in September, the lowest since January 2021. Core inflation (urban) also declined to single digits at 9.3pc year-on-year, further easing underlying pressures. Year-to-date, the Consumer Price Index (CPI) growth stood at 15.7pc and core inflation in urban areas at 12.8pc.

The S&P Global expected the inflation to “continue its downward trend in the coming months, driven by favourable base effects” but noted that it was likely to remain in double digits on a cumulative basis, forecasting an average inflation rate of 13.2pc for the current year.

Based on this outlook, the S&P said the State Bank of Pakistan (SBP) had additional room to reduce its policy rate. The SBP has already cut rates by 450 basis points since June, and “we expect another 200-basis-point reduction by the end of 2024 in the form of a rate cut in both the November and December 2024 meetings of the Monetary Policy Committee (MPC)”, the analytical note observed.

“However, the risks are skewed to the upside, and they include the impact of budgetary measures such as higher taxes on the agriculture, wholesale, and retail sectors, and anticipated further increases in electricity and gas tariffs under the new IMF Extended Fund Facility (EFF) programme,” it concluded.

Almost two months ago, S&P Global Marketing Intelligence’s sister firm, S&P Global Ratings, had kept Pakistan’s credit rating unchanged (at CCC+), citing heavy dependence on foreign assistance for debt obligations, elevated inflation and political risks to the economic situation and structural reforms.

It had said the official aid helped to increase Pakistan’s foreign exchange reserves, but the country remained dependent on sustained support and the rollover of credit facilities to maintain its external buffers, which were still low. “Hefty debt-servicing costs continue to exert pressure on the government’s fiscal position at a time of high inflation, tight monetary conditions, and elevated political uncertainties that may affect the efficacy of policymaking”.

Published in Dawn, October 2nd, 2024