State Bank of Pakistan’s Monetary Policy Committee (MPC) decided to increase the policy rate by 25bps to 7.25% citing more than expected demand growth and economic recovery, lower vulnerability to COVID due to aggressive vaccination campaign carried out by the government.
In a post announcement meeting with Banks Representatives, Governor SBP said SBP will now focus on protecting the stability of the growth along with keeping the Current Account Deficit in manageable range.
SBP Governor furthere stated that although Current Account Deficit remains high, however, it is within the SBP forecasted range of CAD forecast 2-3% of GDP. He further said that impact of deficit on Exchange rate has yet to be seen.
He mentioned that along with Currency Depreciation, Interest Rates also needed to be adjusted to manage the External Deficit.
The meeting also highlighted that discussion with IMF are underway to restart the program, while formal discussions will start by the end of this month.
He mentioned that several adjustments as required by IMF program has already been done, while Difference with IMF is on the implementation of Fiscal measures and energy sector reforms remains. Pakistan’s Debt to GDP has reduced since the start of the COVID along with significant increase foreign reserves which was one of the prime concern of IMF program.
Governor SBP highlighted that SBP is monitoring the Afghanistan situation and assumption about is early. He said that SBP is monitoring cash markets specifically money exchanges near the border area with the help of FBR. Secondly, the later impact of Afghan fallout is expected to be of fiscal burden on Pakistan, where local resources will be used in Afghanistan to provide support while law and order situation may also get impacted.
As per Dr. Reza Baqir, this time Economic Growth will come with Flexible Exchange Rate regime (i.e economy will adjust to depreciating Currency).
Moreover, SBP is optimist about Remittances and expect it to continue the trend on the back of increase in overseas Pakistanis. SBP also expects rapid recovery in economic activities, resulting in positive Output Gap by the end of FY22.
Outlook
SBP has indicated that it will slowly turn Real Interest Rates into Mildly Positively territory. With Inflation likely to average 9%, it is expected that Interest Rate is on its way to above 9% as SBP rolls back monetary stimulus of the economy.
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