The monetary environment in Pakistan during the first quarter of FY2025 (1 July – 30 September) has shown favorable conditions for controlling inflation, contributing to a more stable financial landscape. The country’s money supply (M2) experienced a slight contraction of 0.8%, amounting to a reduction of Rs 290.0 billion, compared to a modest growth of 0.01% (Rs 1.9 billion) during the same period last year. The deceleration in M2 growth was primarily driven by the contraction in both the Net Foreign Assets (NFA) and the Net Domestic Assets (NDA) components of the money supply, reflecting a tighter monetary policy stance that has contributed to inflation control.
A significant factor behind this slowdown was the performance of private sector credit. During the July-September period, private sector credit observed a net retirement of Rs 127.6 billion, contrasting with a larger net retirement of Rs 194.5 billion in the same period last year. This indicates a restrained credit flow, which is in line with efforts to manage inflationary pressures while maintaining financial stability. The tightening of credit to the private sector suggests that monetary authorities are taking a cautious approach to avoid overheating the economy, while keeping inflation in check.
At the same time, Pakistan’s stock market continues to exhibit a positive performance, signaling investor confidence in the country’s economic trajectory. The Karachi Stock Exchange (KSE)-100 index maintained its bullish trend in September 2024, closing at 81,114 points at the end of the month. This represents a gain of 2,626 points during the month, reflecting a strong uptick in investor sentiment. The market capitalization of the KSE-100 index also saw a significant increase, rising by Rs 134 billion to settle at Rs 10,619 billion by month-end. This continued growth in the stock market is indicative of investor optimism, despite ongoing inflation concerns, and suggests a growing confidence in the market’s ability to recover.
The favorable monetary conditions, alongside the positive performance in the stock market, suggest that Pakistan’s economy is undergoing a period of stabilization, albeit with challenges. The continued trend in the stock market could be attributed to a combination of favorable liquidity conditions and investor optimism, likely fueled by expectations of economic recovery. As inflation remains under control, supported by the current monetary stance, investors are showing increased willingness to invest in equities, which is reflected in the market’s upward momentum.
While the overall economic outlook remains cautious, the continued growth in the stock market provides a positive signal for the economy, suggesting that businesses and investors are adapting well to the current monetary environment. The decline in private sector credit, while potentially limiting short-term growth, is also seen as a necessary measure to ensure long-term financial stability and control inflation, which could lay a solid foundation for sustainable economic growth.
In conclusion, the monetary policy measures being adopted in Pakistan are helping to manage inflation while contributing to a positive investment climate. The stock market’s upward trajectory, alongside controlled inflation and tighter credit conditions, points to a cautiously optimistic outlook for the remainder of FY2025, assuming that global economic conditions remain favorable.
Source: GoP Finance Division