SBP has kept the interest rates unchanged at 22 percent. That was a surprise for a few, as the general expectations were changed to further increases, after the release of the IMF report. Interestingly, prior to the release of IMF’s staff report, the market was expecting no change. However, the language written by the Pakistan authorities in MEFP was suggestive of further increase.

Then the analysts start incorporating the impact of recent uptick in the global commodity prices in the forecasts. Power prices have already increased. SBP is implying that the impact has already been taken in its forecast of 20-22 percent inflation in FY24.

However, the expected increase in petroleum prices (for the fortnight announcement awaited at the time of writing) is yet to be incorporated. The increase is calculated at Rs20-25 per liter of petrol and diesel. SBP is waiting for the increase and its impact on inflation. The monetary policy is said to be data driven, going forward.

However, when data is expected to be higher, there is tendency to increase prices earlier than the cost increase. A hawkish stance can help to un-anchor the buildup of inflationary expectations, and to stabilize currency and higher price fixation by producers. Recent financial results of FMGC companies suggest that the price increase in products is higher than the cost increase, as the gross margins in some cases have swelled.

That pattern perhaps can be seen in many other products. Price increase is generally higher than the cost when inflationary expectations are built, and that causes higher inflation itself. A hawkish stance could have been better to tackle such inflation.

Anyhow, historically, the key impetus of monetary policy in Pakistan has been the external account. Within it, the current account is being managed. SBP is expecting the deficit to be 0.5 to 1.5 percent of GDP in FY24. The demand has already been suppressed. Not much can be done by interest rate increase on demand which is already at lower ebb.

The other issue is dollarization in the country and depreciation expectations which are reflected in prices. Confidence in PKR needs to be restored. And a higher nominal return in rupees saving and in turn investment is better for PKR.

The prime objective of monetary policy is to control inflation. And for that, confidence in PKR is important, and for that dollar inflows are the key. With improved external account position, SBP can think of attracting foreign portfolio investment in government debt securities (hot money) to plug in the external account gaps. In the analyst briefing, the Governor said that there is a gap of $9 billion this year. SBP should explore market options now, apart from the investment pledged by friendly countries.