EDITORIAL: The Monetary Policy Committee (MPC) under the chairmanship of Governor State Bank of Pakistan, Jameel Ahmed, cut the policy rate by 100 basis points - from 13 to 12 percent effective 28 January - on the back of a continued decline in inflation driven by “moderate domestic demand conditions and supportive supply side dynamics amidst a favourable base effect.”
Moderate demand conditions were attributed to the decline in electricity tariffs in November of around 7 paisa per unit (hearing by Nepra on December fuel charges adjustment is scheduled for 30 January 2025 during which the government is on course to reduce energy charges by another 1.03 rupees per unit).
And the winter package announced for December, January and February, with approval from the International Monetary Fund (IMF), will be at the rate of 26.07 rupees per unit for all categories of consumers on incremental consumption – a package targeted to raise consumption, lower the capacity charges and thereby reduce the pressure to raise tariffs further to achieve full cost recovery.
Supply side dynamics related to adequate supply of edibles in the market while stability in foreign exchange ensured that imports did not cost higher in rupee terms.
And finally, the base effect from the corresponding period of the year before is massive – consumer price index was 4.1 percent in December 2024 against 29.7 percent in December 2023.
Be that as it may, although the consumer price index July-December 2023-24 was 28.79 percent while in the comparable period of 2024-25 it was 7.22 percent, a decline of 21.97 percent, with core inflation (non-food and non-energy) declining from 18.2 percent in December 2023 to 8.1 percent in December 2024 or a decline of 10 percent that mirrors the reduction in the policy rate from a high of 22 percent to 12 percent.
It is critical to note that core inflation in November was 8.9 percent and on 16 December (when the last MPC met) the decline in electricity tariff was projected to reduce consumer price index by end December (calculated at 0.8 percent) while core inflation also declined by 0.8 percent between November and December 2024 – a rate measured by prices of goods and services that are not volatile and their impact on incomes.
However, core inflation may be understated in Pakistan’s case as it takes account of the rise in incomes for the 7 percent in government employment whose incomes are routinely raised in budgets (this year by 20 to 25 percent) while the remaining 93 percent working in the private sector have not witnessed any raise in salaries for the past three to four years.
However, the Monetary Policy Statement (MPS) acknowledged that core inflation remained elevated, adding that “inflation expectations remained volatile.”
MPS also projected the growth rate would remain within the range of 2.5 to 3.5 percent – a rate that belies the continuing negativity in the large-scale manufacturing sector (at negative 0.6 percent July-October this year) though there has been a rise in private sector credit to 1.4 trillion rupees with the bulk for portfolio investment.
It is important to note that the Fund has expressed concerns over “important shortcomings in the source data available” with respect to Government Finance Statistics (GFS) and Producer Price Index (PPI) and has extended a technical assistance to the Pakistan Bureau of Statistics to begin “fieldwork for four major surveys ahead of the upcoming national accounts rebasing to fiscal year 2026.”
The MPS also noted the current account surplus on the back of higher remittances. The MPS stated that net financial inflows, though tepid during the first quarter of fiscal year 2025, are expected to improve going further. In this context it is relevant to note that the Federal Finance Minister recently revealed that a billion dollars had been procured from two Middle Eastern banks at the rate of 7 percent per annum yet to date they have not been credited to the SBP account – a rate lower than the policy rate.
Pakistan’s rating, however, remains in the junk category and therefore any further inflows are likely to be at a high rate.
And while borrowing costs from abroad appear to be cheaper than from domestic sources yet it is inadvisable to rely on borrowing from abroad, as was the policy during 2013-18, as foreign indebtedness requires reserves that the country simply does not have at present especially as reserves are equal to two months of imports with the international standard being a minimum of 3 months of imports.
What is concerning is that in his press conference Governor SBP stated that the total debt external payable (Interest and the principal as and when due) this year was 26.1 billion dollars while rollovers, read heavy reliance on the three friendly countries, were 16 billion dollars and out of the remaining 10 billion dollars 6.4 billion dollars have been paid out or, in other words, the country was able to clear only 25 percent of its dues in spite of the current account surplus with another 3.6 billion dollars due by the end of June his year.
In this context, it is relevant to note that the IMF staff-level agreement report on the ongoing programme dated 10 October 2024 urged the government to concentrate its efforts “on diversification and expansion of the investor base to reduce the severity of the sovereign-bank nexus.
Sustaining the recent progress in lengthening of domestic maturities, aided by an IT on the average time-to-maturity of domestic securities, is also important to mitigate the risks from the elevated gross financing needs.“
Given the SBP’s history of complying with IMF conditions on which its governor has affixed his signature, it is a foregone conclusion that the reduction in the rate was approved by the Fund which must have taken some convincing, given the latter’s reference to important shortcomings in GFS and PPI.
The reduction was perhaps to convince domestic investors that the cost of doing business was coming down though still the policy rate remains the highest in the region – India’s 6.5 percent and Bangladesh 9.5 percent.
Copyright Business Recorder, 2025
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