State Bank of Pakistan leaves policy rate unchanged

State Bank of Pakistan (SBP) decided to leave the policy rate unchanged at 15% which was in line with market expectations. SBP had cumulatively raised the policy rate by 800bps to 15% since September 2021 to cool down overheating of economy and contain current account deficit.

Further, administrative measures for import control were also taken recently and fiscal consolidation is also planned for FY23.

Inflation in July 2022 increased to 25%YoY as against 21% in June 2022, but broadly remained in line with what SBP had anticipated earlier.

Trade deficit in July 2022 also fell sharply (halved to US$2.7 billion and global commodity prices have also started coming down which will improve our external account situation.

Pakistan also secured additional financing of US$4 billion from friendly countries over and above the available financing to Pakistan.  

After securing additional funding of US$4 billion, revival of IMF program is also in sight as its Board meeting for the approval of Pakistan’s next tranche is scheduled on August 29, 2022.

SBP keeping in view the impact of these decisions like moderation in domestic demand and improvement in external account, decided to keep the policy rate unchanged. 

SBP maintained its inflation forecast of 18% to 20% for FY23. It also anticipates it to improve to 5% to 7% by the end of FY24.

SBP expects GDP growth for FY23 to be in the range of 3% to 4% as against growth of 6% last year.

Current Account deficit is projected to be around 3% of GDP or US$10 billion) in FY23 as against US$17 billion or 4% of GDP in FY22. 

The SBP Monetary Policy Committee promises to continue to remain data driven and pay attention on inflation expectations, development on fiscal & external front, global commodity prices and interest rates decisions by major central banks.

Foreign exchange reserves are likely to increase to US$16 billion by FY23. This will be driven by additional financing that will be available to Pakistan in FY23. This will also be dependent upon Pakistan following key measures agreed with IMF and remaining on track with the program.

Pakistan’s gross financing needs would be around US$30 billion for FY23 which includes Current Account Deficit and debt repayments.

Available financing against this is estimated at US$37 billion for FY23, which has increased after Pakistan secured US$4 billion of financing from friendly countries.    

Financing of US$4 billion includes US$2 billion from Qatar, US$1 billion of deferred oil facility from Saudi Arabia, and US$1 billion investment from UAE. 

Pakistan’s short term external debt constitute around 6% of the total external debt hence maturity profile of Pakistan external debt is not an issue. However, low private sector flows like FDI and portfolio investment is a key concern. 

FY23 budget targets a primary surplus, on the back of significantly higher tax revenue. It envisages a strong fiscal consolidation of around 3% of GDP as per SBP.