Policy status quo

The latest iteration of the central bank’s monetary policy confirms that Pakistan’s economy may just have pulled clear of the dark cloud of stagflation. The monetary policy statement put out by the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday noted that headline inflation is on the wane after peaking in May 2023 at a back-breaking 38 per cent, indicating inflationary expectations are finally ebbing. This is good news in and of itself – although real growth will have to wait for at least one more fiscal year, as already indicated by the slightly contractionary draft budget unveiled by Finance Minister Ishaq Dar late last week. The committee chalked up the rudimentary downturn in inflation to an easing of global commodity prices and financial conditions, a trend it hopes persists. It pointed out the contribution of domestic supply chain issues to the peak May inflation as well as elevated level of inflationary expectations. It is a pity that the common Pakistani, already grunting under the burden of stellar economic hardship, has to shoulder additional burden of food inflation because the country has devolved into an administrative hinterland with caretaker governments in two provinces and a politically beleaguered federal government. Imported inflation because of the weak rupee obviously continues to play a part in keeping inflation at elevated levels. The committee has decided to maintain the policy rate at 21 per cent, a move in line with broad market expectations.

SBP Governor Jameel Ahmad has clarified in strong and unequivocal terms that no proposal to seek a debt restructuring from Pakistan’s bilateral lenders is under consideration. While this is a good policy stance, the fact remains that Pakistan has to repay around $23bn over FY24 in debt service – in addition to the $3.6bn the country must fork out this month to round out FY23. Of this, $400m has been repaid and $2.3bn is expected to be rolled over, still leaving $900m to be financed. It is difficult to see how the government hopes to come with the requisite funds in hard currency to meet the external sector obligations over FY24. Clearly, the authorities are still counting on a helping hand from the IMF in the shape of a new programme, with discussions still ongoing over the much-delayed ninth review of the outgoing programme. The outcome is very much hinged on the final budget numbers for FY24 as well as on revised current account deficit and primary balance tallies for FY23. Pakistan had agreed with the Fund to return a primary surplus of 0.5 per cent of GDP for FY23, but revised estimates put fiscal deficit and primary deficit for FY23 respectively at 7.0 per cent and 0.5 per cent, which is likely to irk the Fund staff. The target fiscal deficit for FY24 at 6.5 per cent seems simultaneously too bad for the Fund’s liking and too good to be achieved.

Prime Minister Shehbaz Sharif’s economy czar Ishaq Dar has already said that if worst comes to worst, Pakistan is good to go without IMF help – a claim markets are taking with a grain of salt, especially as our foreign exchange reserves are vacillating on the wrong side of $4bn. Is it possible that Dar & co are looking to source a major portion of Pakistan’s petroleum imports from Russia and Iran? A combination of barter trade, deferred payments, and reliance on Chinese currency swaps could certainly help take some pressure off Pakistan’s flagging foreign exchange reserves, but it remains to be seen if we can swing enough orders to these new suppliers to make a difference. Equally important, there is no clarity as to whether many refineries in Pakistan are equipped to handle Russian crude. All in all, the latest monetary policy comes across as hard-nosed, clinical, and astute, but amply demonstrates how little fiscal space the authorities have. Here’s hoping the MPC’s assumptions of no unexpected domestic and external shocks hold throughout the fiscal, and Dar can conjure something out of the ordinary to turn things around.