Pakistan cautious ahead of key IMF talks

The State Bank of Pakistan (SBP) maintained the policy rate at 22%, on April 29, 2023. Market expectations were divided between no-change and a cut.

CPI had decelerated to 20% in March from a recent peak of 38% (May 2023), and the CA balance in March was a surplus of US$619 million, with 9MFY24 current account deficit of only US$0.5 billion – both, along with ongoing fiscal contraction, supported a rate cut.

However, the SBP overweighed the risks to inflation emanating from – a volatile geopolitical backdrop due to tensions in the Middle East and its impact on global oil prices, other global commodity prices likely to have bottomed out, and perhaps more importantly, the terms of the next IMF program.

Despite the tight monetary conditions, the SBP’s outlook for GDP growth for FY24 of 2-3% remains intact, supported by a robust agricultural sector. Most major crops (rice and maize) are projected to exceed the targets for the year. LSM growth in 8MFY24 was negative 0.5% as against negative4% last year, but it is expected to perform better in the remaining months.

Core inflation continued to decline in March – to 15.7% from 18.1% in February 2024. Encouragingly, the contribution of wage growth to overall CPI has also diminished considerably in recent months. These reinforce the outlook for continued disinflation in the coming months. However, risks to inflation emanate from volatile geopolitics, global commodity prices and the extent to which the next fiscal budget will be inflationary.

External financial inflows in Pakistan have been weak in recent months, as global central banks have adopted a cautious policy stance. The SBP wants to build-up further FX buffers (in the face of above uncertainties) before adopting an accommodative stance.

Outstanding debt repayments until June 2024 are US$1.8 billion (principal only), while Pakistan is likely to receive the final tranche of IMF SBA program, of US$1.1 billion.

Monetary aggregates (M2 growth) is expected to decelerate in the coming months to under inflation (from 17.1% in March), and the SBP expects the government to maintain the primary surplus of around 1.8% of GDP until year-end.

Analysts believe even if inflation and the external account continue to improve in the coming months, the June announcement would be mainly influenced by IMF conditions for a new program – any further adjustments in energy tariffs and the budgetary measures that the Fund will demand.