EUR 40.00 For Business Accounts Only

Pakistan Economy: SBP keeps policy rate intact at 7.0%; Good news on IMF expected soon

• In the latest Monetary Policy announcement, Pakistan’s Central Bank (State Bank of Pakistan - SBP) has maintained Policy Rate at 7.0% - inline with ours and market’s expectations.
• Inflation: SBP, in its statement, highlighted that though recent CPI inflation readings have been on the higher side, the more recent SPI out turns suggest weakening in the momentum of food prices. It further adds that favorable base effects and spare capacity in the economy should help contain inflation. SBP maintains that average inflation is likely to fall in the range of 7-9% in FY21. We expect inflation at 8.0-8.5% in FY21.
• Growth: SBP says domestic recovery has gradually gained traction, in line with expectations of slightly above 2% GDP growth in FY21. However, recent rise in COVID-19 cases in Pakistan and many other countries presents considerable downside risks. Recovery has been led by construction and manufacturing. Agriculture maybe impacted by decline in cotton production, while social distancing continues to weigh more heavily on certain parts of the services sector. We expect GDP growth at 2.0-2.5% in FY21.
• External account: Based on the performance to date, the outlook for the external sector has improved further and the Current Account deficit for FY21 is now projected to be below 2% of GDP by SBP. We expect Current Account deficit at 1.2-2.0% of GDP.
• Fiscal account: Despite lower non-tax revenue, primary balance came in at 0.6% of GDP in 1QFY21. Higher overall budget deficit due to larger domestic interest payments should taper as benefits of recent interest rate cuts filter through.

Analyst briefing takeaways

• One of the key reason for keeping the Policy Rate unchanged was no change in inflation expectations of 7-9% for FY21 since last monetary policy meeting in Sept-2020.
• There are no evidences of demand side pressures on inflation, as output gap is still negative.
• SPI is also easing, which hopefully will bring down CPI on a YoY basis over the new few months.
• SBP looks at both Core and Headline inflation numbers. The latter is important as higher food prices will potentially result in increase in demand for wage increase, which in turn will lead to higher product and services prices.
• There will be some positive news on IMF soon. The gap between the IMF and government officials is closing and the discussions between the two are mainly on timing of measures, which include increase in electricity tariffs and revenues.
• The Current Account deficit target for FY21 has been lowered to below 2% from 2% earlier owing to higher than expected Remittances. This includes the impact of increase in import of machinery under Temporary Economic Refinance Facility (TERF).
• The trend in remittances in South Asia has been largely similar as more flows are routed through the formal channel. 
• The increase in reserves has not been due to increase in net government borrowing. It is mainly due to SBP reserve building which resulted in good quality increase in SBP reserves.
• The external financing needs are well taken care of through multilateral financing and potential Eurobond issue.
• The increase in export has been due to both increase in quantity and prices, whereas the decline in imports has been due to prices as quantity has increased.
• The growth outlook also remains unchanged. There have been both positives and negatives on this front since the last monetary policy meeting. The momentum in economy has gained traction on the back of government and SBP stimulus. However, there has been a noticeable increase in COVID-19 cases both locally and globally. The increase in cases globally can potentially lead to decline in exports and aversion of international capital from markets.
• Business confidence continues to improve, touching two year highs.
• Fixed investment and personal loans are picking up, while private sector credit and working capital requirements remain in negative territory.
• Credit offtake is expected to pick up as suggested by both demand and supply side factors.
• Both consumer and business inflation expectations remain well anchored.
• 41% of the Other Forecasters surveyed by SBP expect GDP growth to be between 1.0-1.9% and 37% between 2.0-2.9%.

37% of the Other Forecasters surveyed by SBP expect inflation to be between 7.0-7.9% and 39% between 8.0-8.9%.