ISLAMABAD: Inflation has come down sharply, but is expected to remain volatile and increase in the remaining two quarters of current fiscal year as well as in the first quarter of next fiscal year on account of base effect and expected increase in energy prices.
This was stated by Jameel Ahmad, governor State Bank of Pakistan (SBP), while briefing the Senate Standing Committee on Finance and Revenue, which met with Saleem Mandviwalla in the chair, here on Monday.
The governor also informed that in view of encouraging trends, easing financial conditions and improving external position, the SBP projects real GDP growth in the range of 2.5 percent to 3.5 percent for fiscal year 2025.
Inflation in Pakistan clocks in at 4.1% in December 2024
The SBP governor apprised that things are moving in the right direction, with indicators of inflation and the policy rate showing a downward trend. He stated that the inflation rate has come down to 4.1 percent compared to 38 percent in May 2023.
Additionally, the policy rate has come down to 13 percent, which was previously 22 percent, and it is expected that the policy rate will be in single digits in the coming months.
Appropriate monetary policy stance, supported by fiscal consolidation and improved domestic supply led to a sustained downward trajectory in inflation from 38 percent in May 2023 to 7.2 percent in the first half of current fiscal year and would achieve the mid-term target of 5-7 percent. The SBP governor; however, warned that risks exist and inflation may increase during the last quarters of current fiscal year and first quarter of next fiscal year.
“Drop in inflation led to reduction in the policy rate. The medium-term inflation is expected to remain between five to seven percent,” the SBP governor said. Mandviwalla said that 13 percent policy rate must go down further keeping in view the falling inflation.
Committee members including Shibli Faraz and Mohsin Aziz said that market lacks public confidence. Aziz said that people purchasing power went down, resulting in reduced sale in wholesale market and, even major brands slashed rates.
Governor SBP said that the current account deficit has reduced to 1.7 percent compared to 17.5 percent in the financial year 2022, and it is expected that it will come around 0.1 percent by the end of current financial year. In the country’s import bill of $4.2 billion in November 2024, the share of petroleum products is only $0.9 billion. Increase in exports and strong remittances helped in narrowing the current account deficit. Faraz inquired about the decline in the imports of petroleum products.
The SBP governor replied that the volume of petroleum products has decreased; however, the import bill mainly decreased due to low international prices.
Federal Minister for Finance and Revenue Senator Muhammad Aurangzeb said the country was moving on path of economic stability due to government’s prudent policies. Policy rate slashed by 9 basis points.Kibor, which affects the industry come down below 12 percent resulted in brining borrowing cost to half, said the minister, adding that impacts would be visible in next 2-3 months.
The finance minister also asked for agreeing upon charter of economy to move forward. Faraz said that FDI is abysmal, besides lack of market confidence, rule of law and democracy.
Admitting in rise in chicken prices in the country, minister said that administrative measures and enforcement are critical as middlemen were taking advantage resisting to reducethe prices of essential goods despite a decline in international commodities prices, transportation cost and oil prices.
Talking about debt, the SBP governor said that of around $10 billion, the country repaid $5.7 billion while $4.5 billion would be paid in the remaining period of current fiscal year. Besides, the government had to rollovers of $16 billion, and there is no issues. Ahmed confirmed that a UAE safe deposit will be cleared on schedule this month, later told media. The committee raised questions on the nearly Rs400 billion shortfall in revenue target and fiscal deficit, Governor SBP said that cut in policy rate would help in reducing debt servicing by around Rs1.5 trillion from Rs9.8 trillion to Rs8.3 trillion and would help the government in achieving the fiscal deficit target of six percent.
Jameel Ahmad remarked that the SBP reserves currently stand at around $11.7 billion, which increased without an increase in debt. In 2018, the country’s debt was around $100 billion against the SBP reserves of $3 billion, but as of today, it has risen to $11.7 billion against the country’s debt of $100 billion. He said improved current balance helped in building SBP’s reserves and stabilising the exchange rate.
Pakistan’s foreign exchange reserves are the lowest among regional countries when compared to their import bills.
The SBP governor also highlighted areas of improvement in the country’s economy. He stated that Pakistan is a country that spends only 1.9 percent and 0.8 percent of its GDP on education and health, and these numbers are really low compared to Turkey, India, Brazil, the Philippines, and Sri Lanka. He opined that the country needs to spend more on these sectors, as it may constrain long-term sustainable growth.
Committee members also raised questions on buying dollars from the market, while saying that the market is expecting a decline in dollar rate, if SBP stops buying. The SBP governor said that currently market determined exchange rate is applicable, and if there was any point, IMF would have been the first to raise question.
The chairman committee highlighted the issue of fees being charged by VISA and MasterCard on domestic withdrawals. He revealed that around $2.5 million is being paid every week by almost every bank in the country, and surprisingly, consumers have been charged in dollars on every domestic withdrawal and transaction.
The SBP governor informed that, to tackle the issue, the SBP introduced PayPak in 2016, and as of now, PayPak has acquired 23 percent market share. Chairman Committee stated that the charges should not be applied to domestic transactions, and most importantly, they should not be charged in dollars.
The Committee recommended that the SBP find a long-term solution for the issue and also directed the SBP to provide the details of the amounts paid by the banks in lieu of fees.
The chairman of the committee warned that unless banks halt dollar payments for local services, legislation will be considered.
Copyright Business Recorder, 2025
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