The start of this week saw the State Bank of Pakistan cut its key policy rate by 100 basis points to 12 per cent, marking the central bank’s sixth straight rate reduction since June of last year. Since then, the SBP has slashed a cumulative 1000 points from the policy rate, bringing it down from a high of 22 per cent to its current three-year low. The latest cut, similar to the ones that preceded it, came on the back of data showing declining inflation. The Consumer Price Index slowed to 4.1 per cent in December, aided by tame domestic demand, supportive supply side conditions and a favourable base effect. The latter indicates that while inflation may indeed be slowing down, the decline is not as steep as the numbers would suggest given that inflation was unusually high in 2023 as compared to December 2024. Still, the SBP had revised its inflation projections for the ongoing fiscal year (FY2024-25) from an earlier estimate of 11.5-13.5 per cent to a new range of 5.5-7.5 per cent, while maintaining a full-year GDP growth forecast of 2.5-3.5 per cent. The central bank has also noted that the outlook for the current account balance has significantly improved due to a surge in remittances, which reached an all-time high of $8.8 billion in the first quarter of FY2024-25, and is now expected to remain between a surplus and a deficit of 0.5 per cent of GDP in FY2024-25.
As such, the economy is in a much better place at the start of the current year than during the same period last year. The threat of default has been averted, for now. However, the SBP’s tame growth projections indicate that the rate cuts that the country has had are not sufficient to lift the economy, even if they do help. The GDP growth rate nosedived to 0.9 per cent during the first quarter of the current fiscal year, making the government’s 2.5-3.0 per cent projections almost seem optimistic. The reality is that even these relatively upbeat projections are far too low for a country whose population is expanding as rapidly as Pakistan’s. And, while there has been some price relief for ordinary people, in the fact that further increases are not coming as fast as they were a year or two ago, the overall cost of living is still too high for too many. Viewed from this lens, the price the country has paid for stabilising its economy, mainly the higher tax rates and tighter budgets tied to the IMF bailout, has truly been very steep.
Aside from foreign loans and other external assistance, the only other thing Pakistan has been able to count on to keep rising rapidly is remittances. An economy so heavily dependent on the good will of foreign creditors and the salaries of expats is unlikely to attain the sustainable growth it needs. Doing that will require the government to get to work in attracting more investment, shedding unproductive industries and restoring the people’s hope in the economy.
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