ISLAMABAD: Owing to multiple persistent underlying factors on the economic front, the Monetary Policy Committee (MPC) of the State Bank of Pakistan preferred to take a cautious decision for keeping policy rate unchanged at 12 percent in its latest verdict.
The first and foremost factor behind this cautious decision was the turning of the current account deficit from surplus into a negative trajectory on a month on month basis in the wake of rising imports last month. The MPC seemed more careful as the IMF review mission was visiting Pakistan and one of its major prescriptions was tightening of fiscal and monetary policies.
Pakistani authorities are trying their utmost to accomplish the first review and release of a second tranche worth $1 billion from the IMF under Extended Fund Facility (EFF). In addition, Pakistan had made a formal request to augment the loan through climate finance of $1 to $1.2 billion along with the ongoing review of the EFF program so the overall size of IMF funding might go up to $8 to $8.2 billion for Pakistan.
Pakistan is vying for achieving a modest real GDP growth rate target of 3.5 percent for the current fiscal year with a caveat that it should not turn into creating imbalances on the front of the economy. In the past, Pakistan’s economy experienced a boom and bust cycle as whenever its growth surpassed 5 percent or beyond it resulted into surfacing a twin deficit known as the current account deficit and fiscal deficit. Ultimately, the country plunged into a balance of payment crisis.
In recent months, the Shehbaz Sharif led government launched the Uraan Pakistan program with a pledge to achieve an export led growth trajectory whereby the exports would be doubled from $30 billion to $60 billion under a medium- term framework.
Earlier, the MPC had consecutively reduced the policy rate from 22 percent to 12 percent due to which the debt servicing bill decreased from the projected amount of Rs 9.7 trillion to Rs 8.4 trillion alone for the current fiscal year, expected saving of Rs 1.3 trillion on the largest ticket item on expenditure front of the federal government.
The MPC highlighted four major factors for keeping policy rate unchanged. The current account turned into a deficit of over $400 million in January 2025 after remaining in surplus over the past few months. This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s FX reserves. Second, Large-Scale Manufacturing (LSM) was still hovering in the negative trajectory during H1-FY25, despite a substantial m/m increase of 19.1 percent in December 2024.
Thirdly, the tax shortfall of FBR widened further in January and February. Fourth, both consumer and business sentiments improved during the latest waves. And lastly, on the global front, uncertainty has increased significantly amidst the ongoing tariff escalations spearheaded by US President Donald Trump, which may have implications for global economic growth, trade and commodity prices.
All factors led to the decision of keeping policy rate at 12 percent for the next two months period but there are still high hopes that the policy rate might enter into single digit zone in the next fiscal year 2025-26 in order to boost up private sector lending and moving towards higher growth trajectory with an aim to achieve higher but sustainable growth.
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