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SBP Post - MPS Analyst Briefing Key Takeaways, (AKD Off the Analyst's Desk Oct 31, 2023)

The State Bank of Pakistan (SBP) announced its monetary policy statement today wherein policy rate was kept unchanged at 22%. Following the announcement, the SBP Governor made the following remarks in the analyst briefing:

• Inflation has largely subsided due to high base effect and declining international commodity prices. Core inflation remains sticky, averaging around 24% during 1QFY24. This is primarily due to higher fuel prices which were passed on by the authorities during 1QFY24, exerting a second round impact on prices of services as well.
• Estimates from Federal Committee on Agriculture (FCA) reveal significant improvements in agricultural output, particularly in cotton production, which is projected to reach 12.8mn bales for the full year. This surge in agri-production will have a positive impact on the external sector.
• Remittances have shown an uptrend during 1QFY24, primarily due to the narrowing gap between interbank and open market rates, alongside several SBP reforms (including remittance incentive schemes).
• SBP’s forward FX liabilities presently stand at US$3.5bn (vs. low of US$5.7bn in Feb’23), reflecting significant improvement in external buffers.
• SBP anticipates contribution from markup expenditures to increase to 1.3% of GDP in FY24 (from 1.1% in FY23). Primary balance is targeted at 0.4% for the full year (vs. –ve 0.8% in FY23), in line with the expectations of the IMF.
• With regards to international uncertainty, SBP maintains a positive outlook for 2HFY24. CPI has already peaked and its downward trend will be more pronounced during 1HFY24. The present policy rate (22%) reflects a highly cautious monetary policy stance. The decision to maintain takes into account the persisting uncertainties and is designed to ensure that real interest rates remain positive on a forward-looking basis.
• The SBP has factored an oil of US$90/bbl for its projections. Furthermore, forecasts for CAD have been revised upwards to 0.5%-1.5% of GDP. Overall, present monetary stance remains restrictive and is appropriate for addressing future developments.
• The recent decline in Currency in Circulation (CIC) is primarily attributed to the elevated interest rates within the banking system (resulting in increased deposits). Additionally, recent administrative measures taken by the authorities have had a favorable impact in reducing CIC.
• Total financing requirements for FY24 stood at US$24.5bn (includes US$3.5bn interest). Country has paid down US$4.3bn (includes US$1.1bn interest) during 4MFY24. Outstanding payable amount for remainder of the year stands at US$20.1bn (includes US$2.3bn interest). Out of the remaining principal of US$17.8bn, SBP expects up to US$12.3bn to be rolled over. This leaves principal debt obligation of US$5.5bn during the remainder of the year.
• Once inflows from the IMF and other bilateral/multilateral begin flowing through, they will positively impact the country’s external buffers. Consequently, the Governor remained confident that they will meet all FX obligations for the year.
• Frequency of OMO injections has decreased recently, primarily due to improving liquidity of banks (and declining CIC), reducing the necessity for injections. SBP will continue to ensure that short-term rates remain aligned with the central bank’s policy stance.
• Regarding the future direction of the exchange rate, governor stated that SBP is monitoring changes to underlying fundamentals (including curbs on grey market/illicit trade), alongside reduction in speculative activities.
• With regards to SBP FX reserves, Governor remains confident that reserves will remain above US$10.4bn mark by June’24, as per the commitment with the IMF, provided that all planned inflows are successfully received.
• The majority of outstanding dividend repatriation are fulfilled. Out of the 128 companies that requested repatriation, approximately 99 companies have received full payment, while remaining have had their partial requests filled.