Monetary Policy (May’25): SBP Cuts Interest Rate
Staff Report
Islamabad: Pakistan Central Bank has reduced monetary policy rate by 100 bps to 11%. This cut is higher than market expectations,” Topline Securities said.
Arib Habib Group has analyzed the impacts of reduction in policy rates for Pakistan.
External account and repayments:
• For the current fiscal year, Pakistan’s total external debt servicing requirement was ~USD 26 bn, of which USD 16bn was expected to be rolled over. Most rollovers have already been secured, while the remainder will be addressed as they fall due. Of the USD 10bn payable, USD 8.5bn has been repaid, with the remaining USD 1.3bn scheduled for repayment in May and June 2025.
• The current account balance has recorded a surplus of USD 1.9bn during the first nine months of the fiscal year, a significant turnaround from past deficits.
• This surplus is primarily driven by higher worker remittances and positive growth in exports, particularly in high-value textiles and rice.Pakistan Stock Market Up 0.47% Amid Policy Rate Cut
• Import volumes have increased, indicating economic recovery, but the fall in global oil prices has kept the overall import bill in check.
• Remittances reached a record high in March, rising to USD 4.1bn, and are expected to reach approximately USD 38bn for the full fiscal year. The increase in remittances is attributed to seasonal factors and the formalization of inflow channels.
• Oil prices have fallen further following recent OPEC decisions, which has helped reduce inflationary pressures and improve Pakistan’s external position.
• Foreign exchange reserves are projected to rise to USD 14bn by Jun’25, supported by current account surpluses and expected financial inflows, including those linked to the IMF program.
• The quality of foreign exchange reserves is improving, as forward liabilities have been reduced significantly, enhancing reserve sustainability.
• The SBP interventions have continued into the current year and have contributed to building up the country’s foreign exchange reserves.
- IMF Program
• The SBP confirmed that Pakistan’s IMF programme is on track, with the first review concluded and the IMF Executive Board scheduled on May 9.
• The SBP stated that no renegotiation with the IMF is currently required, even in the face of new external challenges such as tariffs or geopolitical tensions.
- Monetary policy stance and tools:
• The monetary policy stance remains appropriately positive, with the policy rate set to help anchor inflation within the target range of 5% to 7%.
• In response to a question on the shortening of Open Market Operations (OMO) tenors to 14 days, the SBP clarified that this is not a permanent policy shift but is based on current market liquidity needs.
• The SBP stressed that it will continue to adjust OMO tenors based on market conditions and overall liquidity requirements.
- Inflation:
• Inflation has declined more significantly than previously anticipated, with headline inflation reaching historic lows.
• Food and energy inflation have entered negative territory.
• Regarding inflation, the SBP clarified that while there is no fixed inflation target, it closely monitors current and core inflation trends and anticipates a temporary increase due to base effects.
- Fiscal Management:
• Public debt as a percentage of GDP has declined from 75% to 67%, aided by fiscal consolidation, lower interest payments, and reduced subsidies.
• While the government is likely to meet its overall fiscal deficit target, achieving the primary surplus target of 2.1% of GDP may be challenging due to some revenue shortfalls.
• Nonetheless, fiscal discipline over the past few years has supported monetary policy efforts and macroeconomic stability.
- Real Sector:
• Major crop output was strong in FY24, but initial estimates for FY25 suggest a potential underperformance, particularly in crops like wheat. Weather conditions, water availability, and input prices pose risks to the agriculture sector’s outlook for the coming year.
• Despite these risks, the SBP maintains its projection for real GDP growth in FY25 between 2.5% and 3.5%, with expectations of further acceleration in FY26.
• The wheat crop for the current year is broadly in line with expectations, with an estimated output close to 9mn tons.
• Although wheat has met its target, other major crops, particularly cotton, have underperformed and contributed to weak overall agricultural growth.
• Due to the weak performance in agriculture, the overall growth outlook for this fiscal year relies heavily on the industrial and services sectors.
- Miscellaneous:
• On the topic of auto financing, the SBP said there is no immediate plan to remove the PKR 3mn cap, although macroeconomic indicators have improved.
• The SBP explained that auto sales have already risen by more than 40% during the current fiscal year, despite the cap, indicating sufficient consumer demand is being met.
