KARACHI: State Bank of Pakistan (SBP) Governor Jameel Ahmed on Friday said that political uncertainty weighed heavily on business and consumer sentiments resulting in a contraction of real GDP by 0.2 per cent in FY23.

In the Governor’s Annual Report for 2022-23, which was issued very late as the first half of the current fiscal year has almost come to an end, the SBP chief said the budgetary targets for the government’s fiscal and primary balances were missed by large margins amid less than planned tax revenues, and lower than budgeted reduction in subsidies.

This was despite notable, albeit delayed, fiscal policy measures in the second half of FY23, the SBP governor noted in the report.

“The SBP responded to these challenges by maintaining a contractionary policy stance, raising the policy rate by a cumulative 825 basis points during FY23, in addition to the 675bps increase in FY22,” said the report.

Sees CPI inflation falling to 20-22pc in onging fiscal year

The report also highlights a host of measures that the central bank took to contain domestic demand and imports in the wake of growing pressures on the rupee and the general prices.

“While some of these measures were difficult given their implications on economic activity in the short term, they were necessary to meet external debt obligations as per schedule, and contain greater risks to macroeconomic stability over the medium term,” the central bank chief remarked in the report.

The report said that the average headline national Consumer Price Index inflation surged to 29.2 per cent in FY23 around the upper bound of the SBP’s revised inflation projection range of 27–29pc for FY23.

“This was in line with multi-decade high inflation in most advanced and emerging economies that maintained an aggressive monetary policy stance,” observed Mr Jameel in the report.

While elevated global commodity prices contributed to high inflation outturns, the pressure on the external account and ensuing exchange rate depreciation also contributed to inflationary pressures amid uncertainty over the completion of the 9th review of the IMF’s EFF programme, inadequate external inflows and continued scheduled debt repayments, the SBP governor said.

This was in addition to the pass-through of costlier fuel and food prices; exchange rate depreciation; increases in energy prices and indirect taxes; high inflationary expectations and ensuing growth in wages, he added.

Mr Jameel said the central bank will continue to make decisions to prevent high inflation from becoming entrenched and keep inflation expectations anchored to achieve the medium-term target of 5-7pc by the end of FY25, with FY24 inflation moderating to 20-22pc on account of the impact of contractionary monetary policy, improvements in domestic supplies, softer non-energy global commodity prices, and the high base effect.

The SBP chief acknowledged the central bank’s responsibility of achieving and maintaining price stability while also emphasising the role of fiscal policy and effective administration for price and financial stability, particularly rationalization of government spending, increasing revenue collection, strengthening food and energy supply chains, and enhancing productivity.

However, the report said that this outlook hinges on the absence of adverse shocks stemming from geo-political tensions, unforeseen climate events and unfavourable movements in global commodity prices.

Published in Dawn, December 30th, 2023