• Raises inflation target to 25pc for current fiscal year
• To introduce new currency notes after cabinet’s approval

KARACHI: The State Bank on Monday kept the interest rate unchanged at 22 per cent and increased the inflation target in the range of 23 to 25 per cent for the current fiscal year.

“The Monetary Policy Committee (MPC) deci­ded to maintain the policy rate at 22pc. The frequent and sizeable adjustments in administered energy prices have slowed down the pace of decline in inflation anticipated earlier, besides impeding a sustained decrease in inflation expectations,” SBP Governor Jameel Ahmad said while revealing the monetary policy.

Incorporating the inflation in the first half (July-December) of FY24, the exp­ected significant dec­line in the second half and the evolving risks, the MPC expects average inf­la­tion to fall in the range of 23-25pc during this fiscal year and continue to trend down noticeably in FY25, the central bank said. Earlier, the State Bank projected inflation in the range of 20-22pc.

The main inflation CPI was 29.7pc in December, but Mr Ahmad believes it will come down in January. The SBP has failed to control inflation and has kept the interest rate at 22pc during this fiscal year so far.

The SBP governor said the earlier middle-term target of inflation at 5-7pc was expected to be achieved by June 2025. “However, that target has now been revised and would now be achieved by September 2025 with a difference of one quarter,” he said.

He said the non-energy inflation continues to moderate, in line with the committee’s expectations. On balance, the committee viewed that the real interest rate remained significantly positive on a 12-month forward-looking basis, as inflation is expected to remain on a downward path.

The MPC noted several key developments since its December meeting, which have implications for the economic outlook; the foreign exchange reserves improved; fiscal consolidation remained on track and complemented the monetary policy stance and the business sentiments, as reflected in the recent surveys, continued to improve.

However, Mr Ahmad said the escalated geopolitical tensions in the Red Sea region have led to a surge in global freight charges and are posing risks for global trade and commodity prices.

The real GDP growth projection remains unchanged in the range of 2pc to 3pc for FY24. While Kharif crops’ output already turned out better than last year, the prospects for Rabi crops also appear promising amid better input conditions, he said, adding that in the industrial sector, large-scale manufacturing registered a slight decline in the first five months of FY24, with a moderate increase recorded in November.

External sector

The current account surplus in December helped bring down the July-December deficit by 77pc to $0.8 billion. The exports grew 5.3pc year on year during July-December. The projection of the current account deficit for FY24 remains unchanged in the range of 0.5pc to 1.5pc of GDP, despite the modest economic recovery and elevated level of profit and dividend repatriation.

Fiscal sector

The fiscal position continued to improve during July-October FY24. The overall deficit declined to 0.8pc of GDP from 1.5pc last year, while the primary surplus increased to 1.4pc as compared to 0.2pc last year. “This improvement is mainly led by a significant increase in revenue collection and somewhat restrained expenditures,” the governor said.

He said that both food and core inflation have been moderating for the past few months. This trend reflects the positive impact of a tight monetary policy stance duly supported by ongoing fiscal consolidation, lower global commodity prices, and improved domestic crop output and supplies.

However, the positive impact of these developments is being diluted by sizable adjustments in administered energy prices, especially from November 2023 onwards, he added.

SBP to launch new currency notes

Meanwhile, in a meeting with the analysts and researchers, the SBP governor revealed that the central bank has decided to introduce new currency notes once approved by the cabinet.

This decision is in accordance with international standards, includes upgraded security features, and is intended to address the issue of counterfeit notes, he said. The procedural steps will involve obtaining approval from the board as per legal requirements, followed by the necessary approval from the cabinet.

Meanwhile, he also said that in FY24, Pakistan is slated to repay a total of $24.5bn, encompassing $3.8bn in interest payments and around $20.7bn in principal repayments.

Presently, the bulk of the amount has either been rolled over or successfully repaid, leaving an outstanding balance of $10bn to be settled. Around $5bn of this outstanding amount is anticipated to be rolled over.

Consequently, the net amount to be repaid stands at around $5bn, scheduled for repayment in the remaining months of FY24.

He said the reduction in the SBP’s forward liabilities from $4.5bn in July 232023 to $3.5bn now has not hindered the growth of the country’s reserves. This increase is attributed to surpluses in current account balances and inflows from external sources.

Published in Dawn, January 30th, 2024

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