THE State Bank’s decision to leave the policy rate unchanged at 22pc the second time in a row is in line with wider market expectations. Most analysts anticipated the continuation of a tighter monetary stance, despite the slight deceleration in inflation, the contraction in money supply growth and improvement in other macro indicators. The decision shows that the monetary authorities have adopted a cautious stance by keeping “the real policy rate significantly positive on a 12-month forward-looking basis” to bring down inflation to the medium-term target of 5pc to 7pc by end FY25, disregarding demands for the early initiation of monetary easing. The central bank concedes that global oil price volatility during the Gaza conflict and increased gas tariffs pose a threat to near-term price stability and the current account, but is hopeful that these risks will be offset by fiscal consolidation, improvement in the availability of key commodities, and alignment of the interbank and open market exchange rates.

No doubt the current account deficit has narrowed, the exchange rate improved, the foreign exchange reserves position stabilised to some extent despite tepid external financing, and fiscal consolidation remains on track. But this recovery remains fragile and is unlikely to last without deep structural fiscal reforms and the realisation of planned external inflows. Recently, Goldman Sachs warned that gains in the rupee, which has been among the world’s top performers in the past two months due to the crackdown on the illegal dollar trade, will be short-lived given its financing risks as Pakistan has only short-term IMF and bilateral financing to support the external balance. The reality is that Pakistan still needs $20.2bn, including rollovers of $12.3bn, to make foreign debt payments in the remaining eight months of the fiscal. Even a small external shock can wipe out the recent small gains quickly. It is, therefore, advisable to stay cautious rather than get swayed by momentary successes.

Published in Dawn, November 1st, 2023