State Bank of Pakistan (SBP) Governor Jameel Ahmad on Monday that the Monetary Policy Committee (MPC) has decided to increase the interest rate by 100 basis points, from 16 to 17 percent.
Addressing a press conference after the MPC’s meeting, he said it had been observed that inflationary pressures were not receding despite previous interest rate hikes. “It was noted that price stability was required to control inflation and maintain the growth rate,” he said, adding that “short-term challenges” such as the current account deficit persists and a delay in expected inflows was hampering foreign exchange reserves.
Referring to the global economic situation—including recent reports from the International Monetary Fund and the World Bank that downgraded the global economic growth rate—he said this also had an impact on Pakistan’s economy. “For example, our exports and remittances are impacted,” he said, adding that these external factors were also threatening the country’s projected GDP growth of 2 percent.
“On the external side, we predicted the current account deficit would be $10 billion this year. Our actual performance during the first six months is better than expected. Despite a slowdown in exports and remittances, our current account deficit during July-Dec stood at $3.7 billion,” he said, saying this meant the fiscal year’s overall current account deficit should come under $9 billion.
In a statement issued after the MPC meeting, the central bank said the MPC had reiterated the view that the “short-term” costs of bringing down inflation were preferable to the “long-term” effects of it becoming entrenched. “The MPC also emphasized on the engagements with the multilateral and bilateral partners to overcome domestic uncertainty and to address the near-term external sector challenges,” it added.
Noting that broad-based and sustained moderation in economic activity had resulted from policy tightening and exogenous shocks like last year’s floods, it said sale volumes of automobiles, fuel, and cement had all declined significantly in December on both year-on-year and month-to-month basis. “On the production side, the large-scale manufacturing output declined by 5.5 percent in November 2022,” it said, warning this could reduce further due to production cuts by firms and supply constrains.
On the reduction in imports due to restrictions, the SBP said it had impacted all major groups, except food and petroleum. “Petroleum imports increased by 17.4 percent, resulting in their share (in total imports) rising to 34.1 percent in [the first half of the ongoing fiscal year] from 23.7 percent [last year],” it said, stressing effective implementation of energy conservation measures and appropriate pricing of petroleum products was critical for much-needed reduction in energy imports.
Noting that the 18.2 percent fall in imports had partially been offset by declines in export receipts and remittances, it said the biggest concern for the external sector was a delay in realization of official financial inflows, debt repayments and ongoing political uncertainty. “In this regard, the MPC views that the completion of the pending 9th review under the IMF’s Extended Fund Facility is critical for reducing uncertainty and unlocking multilateral and bilateral inflows,” it added.
The MPC said the fiscal deficit had widened to 1.5 percent of GDP in the first four months of FY23 from 0.9 percent in the same period last year, while the primary surplus had fallen to 0.2 percent of GDP, as compared to 0.3 percent last year. “The FBR taxes grew by 17 percent,” it said, slower than the growth envisaged in the budget. “The expectation of further slowdown in economic activity and reduction in imports in [second half of ongoing fiscal] poses downside risks to maintaining growth momentum in tax collection,” it warned, stressing that the current fiscal stance was inconsistent with monetary tightening and it was important for the fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth.