Policy rate likely to remain unchanged

The monetary policy committee of SBP will convene on Monday (October 10, 2022). We expect SBP to keep the policy rate unchanged at 15% in the upcoming monetary policy. To recall, in the last MPS too, policy rate was kept unchanged at 15%. The current pause of the MPC has been dictated by the planned fiscal consolidation in FY23, recent developments in inflation being in-line with expectations, moderation in domestic demand and improvement in the external position.

The recent Balance of Payment numbers show that Pakistan’s current account deficit decreased by 19% YoY to USD 1.9bn during 2MFY23, as against a deficit of USD 2.4bn during the same period last year. This YoY decline is mainly on the back of lower imports and jump in exports. With the measures taken by the authorities to curb import along with decline in international commodity prices, current account deficit is likely to remain lower in FY23 compared to FY22’s CAD.

As a result of a contained CAD and disbursement from IMF post successful completion of seventh and eighth review, PKR showed recovery against USD in Aug’22 which, however, was short-lived and the following month (Sep’22), PKR depreciated 4.2% against USD. However, SBP believes that Pakistan’s external financing needs should be more than fully met in FY23 aided by rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows. Thus, pressure on the Rupee should lessen while SBP’s FX reserves should assume the upward trajectory which currently stand at USD 8bn (23-Sep-2022). 

In addition, another positive development since the last MPC meeting has been the decline in international prices of major commodities such as WTI (-12%), Coal (-14%), Brent (-9%), Steel (-2%), Cotton (-18%) and Arab Light (-6%). This bodes well for our external account position, hence providing much needed relief to our trade numbers.

On the domestic front, most of the high frequency (demand) indicators showed moderation to decline in growth on a YoY basis. Attributable to monetary and fiscal tightening, which helped shrink the positive output gap and curtail demand side pressures, we saw decline in sales of petroleum products (-23% YoY), cement (-8% YoY), DAP (-79% YoY) and power generation (-12.6% YoY). Moreover, with recent flood damaged agriculture growth, lower yields of cotton and seasonal crops could weigh on growth this year.

As mentioned in the last MPS, SBP is closely monitoring the inflation trajectory. On the inflationary front, the headline inflation continues to remain in the double digit since Nov’21 mainly on the back of uptick in food and energy prices. In the month of Sep’22, headline inflation clocked-in at 23.2% YoY. However, on MoM basis, inflation receded by 1.15% mainly due to cut in electricity cost. Headline inflation, after peaking in Aug’22, has started to taper off. Moreover, it is expected to have peaked in the out-going quarter of FY23 and is likely to come down with high base-effect kicking-in.

Courtesy- AHL Research


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