SBP has maintained the policy rate at 22 percent. It’s a wise decision. SBP expects inflation to taper off in the second half of the fiscal year. The real rates are well in positive, on a 12 M forward-looking basis. Pakistan needs to keep the real rates positive, and currency undervalued (which is the case, as of now), till the time reserves are built and external repayment pressures ease.
The overall tone of the monetary policy and presentation in the analyst briefing is positive. The vibes coming from the SBP is that the economy has bottomed out. The indicators are moving in the right direction be it fiscal, external, money supply (especially reserve money) and inflation. The only unsaid fear is about the fiscal side after the elections. That is why it’s better to be cautious.
SBP has met the IMF’s quantitative targets of NDA and NFA in the 1Q and is all set to meet the targets in the second quarter, as well. However, due to delay in the IMF tranche (expected in January), there would be an adjust oron the NIR.
The overall external position is shaping better, as the forward liabilities keep on declining, and the banks have partially paid the pending dividends of yesteryear. And this year is not as tough as was the last year in terms of external debt repayment, as big chunk of commercial loans is being paid, and are partially replaced by low cost IFI loans. However, there is still a gap of $4-4.5 billion in the remaining fiscal year.
In case of inflation, november number was higher due to gas price adjustment which perhaps is due to some methodology glitch and may not have any second-round impact. SBP has taken the impact into consideration in making the decision. SBP expects inflation to taper off going forward, as international oil prices are coming down and improved availably of agriculture produce. Last year due to floods the food prices increase was erratic, and this year due to better soil conditions the crops are getting better and easing the food inflation.
The key is to look at the money supply where the reserve money is down by Rs722 billion in the fiscal year to date (as compared to an increase of Rs103 bn in the same period last year). This is a good sign, as the sharp uptick in reserve money was a point of big concern. The decline is mainly due to fall in the currency in circulation. The other good factor is uptick in NFA by Rs264 billion whereas NDA declined by Rs987 billion. The improved is also reflecting in the broad money (M2), and over better NFA/ NDA ratio to bode well for the inflation.
The key is to further lower the CIC by documentation and digitization. Here coordinated role of SBP and MoF is important, and any fall in CIC to lower the OMO injection (whichis falling, but still are very high, and in turn to suppress the demand side inflationary pressures.
Fiscal consolidation, keeping real rates high and undervalued currency, would help inflation to come down. Let’s see how close it would go the SBP’s target of 5-7 percent in FY25.
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