In a strategic move aimed at supporting Pakistan’s economic recovery, the State Bank of Pakistan (SBP) announced a reduction in its benchmark policy rate by 250 basis points, bringing it down to 15% effective November 5, 2024. The decision by the central bank signals optimism around the country’s improving inflation outlook and reflects a significant shift in policy to boost investment and economic activity after a challenging period of high inflation.
The SBP’s Monetary Policy Committee (MPC) highlighted faster-than-expected disinflation as the key driver for this rate cut. Recent inflation data has shown promising signs, with inflation rates inching closer to the SBP’s medium-term target. This positive trend has been attributed to a combination of favorable domestic and global conditions, including stable oil prices, a decline in food costs, and no anticipated increases in gas tariffs or the Petroleum Development Levy (PDL). Together, these factors have accelerated disinflation, which the SBP expects to continue over the coming months.
A series of positive macroeconomic developments have further strengthened Pakistan’s economic outlook. Notably, the International Monetary Fund (IMF) recently approved a new Extended Fund Facility (EFF) for Pakistan, signaling international confidence in Pakistan’s fiscal reforms and potentially enhancing foreign inflows. The IMF’s support has contributed to improved investor sentiment, which has also been reflected in better yields on government securities and a notable drop in the Karachi Interbank Offered Rate (KIBOR). October surveys showed a rise in consumer and business confidence, supported by reduced inflation expectations, creating an optimistic credit environment anticipated to drive economic activity and investment in Pakistan.
While the SBP remains positive, it is also cautious of emerging risks that could disrupt this momentum. For instance, tax revenues fell short of targets during the first four months of FY25, contributing to a widening fiscal deficit. Global markets are experiencing volatility, especially with commodity prices. Additionally, the potential for ongoing geopolitical tensions to impact oil prices adds a degree of uncertainty to the SBP’s economic projections.
Despite these challenges, Pakistan’s economic sectors are showing resilience. The agriculture sector has seen a strong output from major Kharif crops, particularly in rice and sugarcane, compensating for underperformance in other areas like maize and cotton. The SBP believes that these favorable agricultural results could boost rural incomes, driving domestic demand in the coming months.
Similarly, the industrial sector is beginning to regain its footing, with industries such as textiles, food processing, and automotive posting solid growth in July and August 2024. This growth trend has encouraged businesses to increase imports of machinery and raw materials, signaling renewed confidence and readiness for sustained expansion. These factors collectively indicate a stable economic trajectory, with the SBP now projecting real GDP growth for FY25 to fall between 2.5% and 3.5%.
On the external front, Pakistan’s current account posted a second consecutive monthly surplus in September 2024, bringing the cumulative deficit to $98 million in Q1-FY25. This improvement is attributed to strong remittance inflows and increased export earnings. Furthermore, with the IMF’s first tranche boosting reserves to $11.2 billion by late October, the SBP projects the current account deficit to stay within a manageable range of 0-1% of GDP. Official inflows are expected to bring reserves to $13 billion by mid-2025, strengthening Pakistan’s external stability and import capabilities.
The fiscal sector shows a mixed picture. While the first quarter of FY25 saw fiscal and primary surpluses, largely due to record profits from the SBP, tax collections remain below target. Although lower interest payments have provided some fiscal breathing room, meeting the primary balance target could be challenging. The SBP emphasized the importance of reforms focused on expanding the tax base and reducing losses in public sector enterprises to support fiscal discipline and sustain macroeconomic stability.
Additionally, Pakistan’s money and credit markets reflect positive momentum. The SBP’s strategy of limiting liquidity injections, seen through reduced outstanding open market operations (OMOs), has shifted banks’ resources toward the private sector, boosting investment and growth.
The SBP’s 250-basis-point rate cut illustrates a commitment to balancing price stability with economic growth, supporting Pakistan’s economic recovery. The central bank remains vigilant, recognizing that ongoing monitoring of domestic and global factors is essential as Pakistan pursues long-term stability and sustainable growth.