The State Bank of Pakistan (SBP) has announced a reduction in the interest rate by 200 basis points, bringing it down to 13 percent, effective from December 17, 2024. This marks the fifth consecutive rate cut by the central bank, following a series of reductions that have cumulatively lowered the policy rate by 900 basis points over the last five monetary policy meetings.
In its statement, the SBP noted a decrease in headline inflation to 4.9 percent year-on-year in November 2024, which aligned with the Monetary Policy Committee’s (MPC) expectations. This decline was primarily due to the continued drop in food inflation and the diminishing impact of the gas tariff hike in November 2023. However, core inflation remains stubbornly high at 9.7 percent, and inflation expectations among consumers and businesses continue to be volatile. The MPC indicated that inflation could remain unpredictable in the short term but is expected to stabilize within the target range over time.
Growth prospects have shown improvement, evidenced by positive high-frequency indicators of economic activity. The MPC’s measured approach of reducing the policy rate aims to control inflation and external account pressures while fostering sustainable economic growth. The committee highlighted several developments that could influence the macroeconomic outlook, such as the current account surplus for the third consecutive month in October 2024, which, along with low financial inflows and substantial official debt repayments, contributed to an increase in the SBP’s foreign exchange reserves to approximately $12 billion. Moreover, global commodity prices remained favorable, positively impacting domestic inflation and the import bill. The committee also observed an increase in credit to the private sector, reflecting improved financial conditions and banks’ efforts to meet their advances-to-deposit ratio targets.
The committee also noted a widening shortfall in tax revenues and emphasized that the cumulative reduction in the policy rate since June 2024 is beginning to show results, which are expected to continue unfolding over the next few quarters. Despite this, the real policy rate remains positively aligned to stabilize inflation within the target range of 5-7 percent.
Looking at the real sector, data suggests that the outlook for economic growth is improving. Risks to the agriculture sector have lessened due to better-than-expected cotton arrivals and encouraging initial reports regarding wheat sowing areas. Additionally, activity in the industrial sector is gaining momentum, with key sectors such as textiles, food, automobiles, and petroleum showing strong growth through the first quarter of FY25. The latest high-frequency indicators, including domestic sales of cement, fertilizer, and petroleum products, suggest that industrial activity is likely to maintain this positive momentum, which will benefit the services sector as well.
For the upcoming period, the MPC expects real GDP growth for FY25 to fall within the upper half of the projected range of 2.5-3.5 percent, supported by improving business confidence and easing financial conditions.
On the external front, Pakistan’s current account continued to improve, posting a surplus of $0.2 billion during the first four months of FY25, driven by strong remittances and exports. Exports grew by 8.7 percent, led by high-value-added textiles, rice, and petroleum exports. Favorable global commodity prices helped contain the import bill, despite rising import volumes. These factors, along with narrowing exchange rate gaps and favorable policies, are expected to keep the current account deficit close to the lower end of the projected 0-1 percent of GDP range in FY25, enabling SBP’s foreign exchange reserves to surpass $13 billion by June 2025.
The fiscal sector showed improvements, with FBR revenues growing by 23 percent year-on-year during July-November FY25. However, this growth falls short of the required target to meet annual revenue goals. On the expenditure side, lower interest rates have led to savings in domestic debt interest payments, which will help contain the fiscal deficit. However, achieving the targeted primary surplus remains a challenge, underscoring the need for fiscal reforms and expanded tax bases.
In terms of money and credit, broad money growth slowed to 13.9 percent year-on-year by November, driven by a decline in government borrowing and an increase in the net foreign assets (NFA) of the banking system. Banks’ lending to the private sector accelerated, reflecting easing financial conditions. Additionally, credit to private businesses and consumer financing saw a notable rise in October 2024.
Headline inflation further decreased to 4.9 percent year-on-year in November, down from 7.2 percent in the previous month, driven by a favorable base effect from gas prices and continued moderation in food inflation. The SBP expects inflation in FY25 to average significantly below the earlier forecast range of 11.5-13.5 percent, though risks remain, such as potential fiscal measures to address revenue shortfalls, a resurgence in food inflation, and global commodity price hikes. Despite these risks, the MPC believes the current monetary policy stance remains appropriate to stabilize inflation within the target range.
