Analysts see unchanged SBP rate; IMF agreement key to easing

KARACHI: The State Bank of Pakistan (SBP) is expected to maintain its monetary policy and hold off from easing its setting until the country secures a new loan from the International Monetary Fund (IMF) to help ensure macroeconomic stability and bolster its economic reform agenda.

The SBP’s Monetary Policy Committee (MPC) is anticipated to keep the benchmark interest rate at a record 22 percent for the seventh consecutive time in the review scheduled for April 29, analysts and financial market participants said.

“The ongoing negotiations with the IMF, which has recommended maintaining a tight monetary policy, underscore the delicate balance the SBP must strike,” said Arif Habib Limited (AHL), a Karachi-based brokerage house, in a note on Friday.

“With the IMF stressing the necessity for continuous economic adjustments and with Pakistan facing substantial debt repayments of $24 billion in the upcoming fiscal year, the SBP is poised to maintain a cautious policy stance,” it added.“This conservative approach, aimed at stabilising the domestic economy while ensuring the approval of a critical new IMF programme, indicates that the SBP might opt to delay any monetary policy easing.”

According to Finance Minister Muhammad Aurangzeb, Pakistan aims to finalise the details of a new IMF programme by May.The country's current $3 billion agreement with the international lender expires in late April, and the minister stated that to help ensure macroeconomic stability and provide a framework for implementing urgently needed structural reforms, the government is looking for a longer and larger bailout from the IMF.

The IMF advised Pakistan to maintain tight monetary policy despite the challenging economic conditions, which have already negatively impacted the government budget and industry output.

IMF managing director Kristalina Georgieva made this statement last week in a speech ahead of the IMF/World Bank Spring meetings in Washington: "Policymakers must resist calls for early interest rate cuts."

"Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening."The SBP is in a crucial position as it weighs signals from the domestic economy against external pressures. Whether to base its policy decision on the latest statistics showing reduced inflation, which could result in a drop in interest rates or to take into account the broader ramifications of global developments (tensions in the Middle East) is the key conundrum before the SBP.

Recent trends suggest a decrease in both headline and core inflation, influenced by a high base effect and stringent macroeconomic policies, a scenario that typically supports a case for lowering interest rates, said AHL.

“This policy adjustment could rejuvenate economic growth by decreasing borrowing costs, thus improving the business environment and enhancing production,” it added.The consumer price index inflation eased to 20.7 percent in March from 23.1 percent in the previous month. The foreign exchange reserves held by the SBP were maintained at $8 billion, despite the repayment of $1 billion Eurobond. The country posted a current account surplus of $128 million in February against a deficit of $303 million in January.

But there are indications of stress in Pakistan's manufacturing sector. In the first eight months of the current fiscal year, the large-scale manufacturing index declined by 0.5 percent on year-on-year basis. Of the 22 sectors, 11 saw negative growth, which is a definite evidence of a major slowdown in the global economy. In addition, the cost of borrowing for the government has skyrocketed, amounting to Rs4.2 trillion in the first half of FY24—or 61 percent of total revenue.

“Complicating matters further are rising global oil prices, currently around $87-88 per barrel, and anticipated fiscal measures in Pakistan’s FY25 budget that could exacerbate inflationary pressures,” AHL noted.

The recent auctions of T-bills indicate that the market's sentiment regarding the monetary policy stance looks to be divided. According to a survey by AHL and Topline Securities, most respondents (51 percent) believe that the policy rate will stay at 22 percent at the next review, while the remaining respondents (48–49 percent) believe that interest rates will decline.

“We believe that the SBP will maintain a cautious approach despite the encouraging trends and adopt a 'watch and see' approach until the inflation trend maintains its fall,” said an analyst at Topline Securities.

“Key risks to the inflation trajectory include an increase in international prices, delay in the release of IMF funds, IMF demanding additional tax measures to meet revenue target in case of any shortfall, and pressure on the dollar against the rupee mainly due to a delay in getting dollar inflows,” the analyst added.