The Committee observed that the June 2024 inflation was
slightly better than anticipated. The Committee also assessed that the inflationary
impact of the FY25 budgetary measures was broadly in line with earlier
expectations.
The external account has continued to improve, as reflected
by the build-up in foreign exchange reserves held by SBP despite substantial
repayments of debt and other obligations.
Considering these developments – along with significantly positive
real interest rate – the Committee viewed that there was a room to further
reduce the policy rate in a calibrated manner to support economic activity,
while keeping inflationary pressures in check.
The Committee noted the following key developments since its
last meeting:
First, the current account deficit narrowed sharply in FY24
and forex reserves of SBP reserves improved significantly from US$4.4 billion
at end June 2023 to above US$9.0 billion.
Second, the country reached a staff level agreement with the
IMF for a 37-month EFF program of about US$7.0 billion.
Third, sentiment surveys conducted in July showed a worsening
in inflation expectations and confidence of both consumers and businesses.
Fourth, international oil prices have remained volatile in
recent weeks, whereas prices of metals and food items have eased.
Lastly, with the ease in inflationary pressures and labour
market conditions, central banks in advanced economies have also started to cut
their policy rates.
Taking stock of these developments, the Committee assessed
that, despite today’s decision, the monetary policy stance remains adequately
tight to guide inflation towards the medium-term target of 5 to 7 percent. This
assessment is also contingent on achieving the targeted fiscal consolidation,
timely realization of planned external inflows and addressing underlying
weaknesses in the economy through structural reforms.
Real
Sector
Latest high-frequency indicators continue to reflect
moderate economic activity. Auto and POL (excluding FO) sales and fertilizer
offtake increased on MoM basis in June.
Large-scale manufacturing also recorded a sharp improvement
in May 2024, mainly driven by the apparel sector.
The growth in agriculture sector, after showing a strong
performance in FY24, is expected to slow down in this fiscal year.
Latest satellite images and input conditions for Kharif
crops also support this assessment. However, activity in the industry and
services sectors is expected to recover, supported by relatively lower interest
rates and higher budgeted development spending.
Based on this, the MPC assessed FY25 real GDP growth in the
range of 2.5 to 3.5 percent as compared to 2.4 percent recorded last year.
External
Sector
After recording surpluses for three consecutive months, the
current account posted a deficit in May and June, in line with the MPC’s
expectation. These deficits were largely due to higher dividend and profit payments
and a seasonal increase in imports, which more than offset a significant
increase in exports and workers’ remittances.
Cumulatively, the current account deficit in FY24 narrowed
significantly to 0.2% of GDP from 1.0% in the preceding year. This, along with
the revival of financial inflows, helped build the SBP’s FX reserves. Looking
ahead, the MPC expects a modest increase in imports, in line with the growth
outlook.
At the same time, the continued robust growth in workers’ remittances,
along with an increase in exports, is expected to contain the current account
deficit in the range of 0 - 1.0 percent of GDP in FY25.
The Committee assessed that the expected financial inflows,
including planned official flows under the IMF program, would help finance this
current account deficit and further strengthen the FX buffers.
Fiscal
Sector
The government’s revised estimates indicate improvement in
fiscal balances during FY24, as the primary balance turned into a surplus and
the overall deficit declined from last year. However, amidst a shortfall in
budgeted external and non-bank financing, the government’s reliance on the
domestic banking system increased significantly.
The Committee expressed concern on increasing reliance on
banks for deficit financing, which has been squeezing borrowing space for the
private sector. For FY25, the government has set the primary surplus target at
2.0% of GDP.
The MPC emphasized on achieving the envisaged fiscal consolidation
and timely realization of planned external inflows to support overall
macroeconomic stability, and build fiscal and external buffers for the country
to respond to future economic shocks.
Money
and Credit
The MPC noted that the trends and composition of monetary aggregates
during FY24 remained consistent with the tight monetary policy stance. Broad
money (M2) and reserve money grew by 16.0% and 2.6%, respectively, well below
the growth in nominal GDP.
Almost the entire growth in M2 was led by bank deposits,
while currency in circulation remained almost at last year’s level. As a
result, the currency to deposit ratio improved, as it declined from 41.1% at
end June 2023 to 33.6% at end June 2024. At the same time, the improvement in
external account increased the contribution of net foreign assets in monetary
expansion.
Meanwhile, the growth in net domestic assets of the banking
system decelerated amidst subdued demand for private sector credit. The Committee
viewed these developments as favorable for the inflation outlook.
Inflation
Outlook
As expected, headline inflation rose to 12.6%YoY in June
2024 from 11.8% in May. This increase was primarily driven by higher
electricity tariffs and Eid-related increase in prices, which were partly
offset by the downward adjustments in domestic fuel prices.
Core inflation, meanwhile, has steadied around 14 percent over
the past two months. The MPC assessed that while the inflationary impact of the
FY25 budget is largely in line with expectations, the available information
indicates that the full impact of these measures may now take some time to fully
reflect in domestic prices.
At the same time, the Committee noted risks to the inflation
outlook from fiscal slippages and ad-hoc decisions related to energy price
adjustments.
On balance, after considering these trends – and accounting
for the sufficiently tight monetary policy stance and ongoing fiscal
consolidation – average inflation is expected to remain in the range of 11.5 to
13.5 percent in FY25, down significantly from 23.4 percent in FY24.
