• Monetary Policy Committee notes inflation outlook susceptible to multiple risks, meeting revenue surplus targets will be uphill task
• Core inflation ‘sticking’ around 9.7pc-mark, despite aggressive cuts during 2024; real GDP growth in FY25 to remain in 2.5pc-3.5pc range

KARACHI: The interest rate is now at 13 per cent after the central bank slashed it by 200 basis points on Monday — in line with what most financial experts foresaw, but still below industry and market expectations.

Aggressive and unpre­ce­dented cuts — from 22pc to 13pc, totalling 900bps — were made by the State Bank of Pakis­tan (SBP) in the second half of calendar year 2024 following an exte­nded period where the interest rate remained stable in an effort to rein in inflation.

Trade and industry circles, however, were calling for a decline of up to 400-500bps to boost economic growth with cheaper money.

However, SBP’s Mone­tary Policy Committee (MPC) argued that the core inflation is static at 9.7pc, whereas the inflation expectations of consumers and businesses remained volatile.

The committee found that headline inflation de­c­lined to 4.9pc in Nov­e­mber, a deceleration that was mainly driven by a continued decline in food inflation, as well as the phasing out of the impact of the hike in gas tariffs from last November.

Due to higher core inf­l­a­tion and the volatile inf­l­a­tion expectations of con­sumers and busine­sses, the committee asse­ssed that the inflation may remain volatile in the near term before stabilising in the target range.

Backing its approach of measured policy rate cuts, the committee also said that growth prospects had somewhat imp­r­o­ved and it had mana­ged to keep inflationary and external account pre­ss­ures in check, while su­p­porting economic gro­wth on a sustainable basis.

The committee asse­ssed that the impact of the cumulative reduction in the policy rate from June 2024 was beginning to unfold and would continue to materialise over the next few quarters.

“The real policy rate remains appropriately positive to stabilize inflation within the target range of 5pc–7pc,” it said.

Inflation

For the uninitiated, headline inflation refers to the raw figure that reflects changes in the consumer price index (CPI) throughout the entire economy, which is measured through a basket of essential goods and services. It differs from core inflation, which is CPI-adjusted to exclude food and energy prices, which fluctuate and are thus considered volatile.

According to the MPC report, headline inflation had eased to 4.9pc and this decline was mainly driven by a favourable base effect from gas prices, along with the continued moderation in food inflation and benign global commodity prices.

Excluding food and energy from the CPI basket means all other items like iron to steel, cement to machinery etc, are facing the high prices of 9.7 per cent compared to 4.9 per cent CPI in Nov 2024.

In case of high core inflation, economic growth would remain slow as the cost of doing business would be higher.

The headline figure, the MPC estimated, may come down further in the coming months, with FY25 inflation being projected to average substantially below the earlier forecast range of 11.5pc–13.5pc.

“The inflation outlook is susceptible to multiple risks, including additional measures to meet the revenue shortfall, the resurgence in food inflation and an increase in global commodity prices,” the MPC said.

Real sector

The data indicates improved prospects for economic growth; the MPC expects real GDP growth in FY25 to remain in the upper half of the projected range of 2.5pc–3.5pc.

In the agriculture sector, downside risks to overall crop outlook have somewhat subsided, while activity in the industrial sector is gaining further traction, the report said. Key large-scale manufacturing sectors — such as textile, food, automobiles, petroleum and tobacco — were already showing strong growth into the first quarter of FY25, it added.

External sector

The current account situation continued to improve and posted a surplus of $200 million during July-October FY25, driven by robust workers’ remittances and strong export performance. Exports grew by 8.7 per cent, said the report.

A sustained uptrend in workers’ remittances and exports, along with favourable international commodity prices, are expected to keep the current account deficit near the lower levels of the projected 0pc–1pc of the GDP in FY25, the MPC said, adding that this will enable the SBP’s forex reserves to surpass $13 billion by June 2025.

Fiscal sector

However, the committee noted that revenue growth was substantially lower than what was required to achieve the annual tax collection target and admitted that achieving the targeted primary surplus would be a challenge. According to the report, considerable efforts and additional measures would be required to meet the annual revenue target.

Money and credit

Bank lending to the private sector and non-banking financial institutions (NBFIs) accelerated amidst the easing financial conditions, and their efforts to comply with minimum advance-to-deposit ratio (ADR) thresholds by end-December 2024, the MPC said.

Credit to private sector businesses had also increased substantially, with consumer financing also recording a noticeable rise in Oct 2024, ever since the policy rate begun its downward trajectory.

Although the MPC said that bank lending had increased in FY24, but the reality is that banks have parked most of their liquidity with NBFIs in the short-term to avoid incremental tax on their ADR, as the government is set to heavily tax banks having less than 50pc ADR by the end of the calendar year.

Published in Dawn, December 17th, 2024