The monetary policy committee of State Bank of Pakistan (SBP) will convene on Tuesday (July 27, 2021) to announce the monetary policy for the next two months. We expect the SBP to keep policy rate unchanged at 7% in the upcoming monetary policy statement.

To recall, the Monetary Policy Committee (MPC) convened last in May’21 and noted that further improvement has been witnessed in the overall domestic recovery, with GDP forecast at 3.94% for FY21. Therefore, in our view, SBP might consider keeping the rate unchanged in order to boost the domestic demand despite running a negative interest rate of ~3% at present. Moreover, the statement also hinted at a very gradual and measured monetary tightening stance, when the need arises.

It also highlighted that core inflation continues to appear restrained and although headline numbers have been inclining, inflation remains manageable. Moreover, inflation, as per SBP, is likely to hover within the 5-7% range in the medium-term. Therefore, it seems likely that the central bank would let the real interest rates remain negative in the medium term.

On the external front, Pakistan closed FY21 with historic high levels of exports (goods) and remittances. The overall trade too remained high as economic activities ramped up. All said, what could have stayed in green ended in red; Current Account posted a deficit of USD 1.9bn in FY21, with a huge USD 1.6bn deficit recorded alone in the month of Jun’21. However, on a YoY basis, current account deficit has come down by 58% during FY21, the lowest deficit after 10-years (Surplus of USD 214mn in FY11). Total imports increased by 17.6%YoY to USD 61.6bn during FY21 while total exports increased by 12.8% YoY to USD 31.6bn during this period. Remittances were a silver lining, reaching USD 29.4bn by FY21 end (up 27% YoY).

Courtesy – AHL Research