SBP holds policy rate at 12%

MPC cites widening C/A deficit, tax revenue shortfalls as key concerns

KARACHI:

With the fading impact of the low-base effect on inflation, along with a widening current account deficit and tax revenue shortfalls, the Monetary Policy Committee (MPC) has opted to maintain Pakistan's policy rate at 12% during its March 10, 2025, meeting, pausing the easing economic cycle.

Despite lower-than-expected inflation in February at 1.5% year-over-year—driven by declines in food and energy prices—the Committee cited risks from price volatility, high core inflation, and external account pressures as key concerns. Rising imports and weak financial inflows have contributed to a widening current account deficit, while tax revenue shortfalls and global economic uncertainty add further challenges. The MPC believes that the existing positive real interest rate is sufficient to maintain macroeconomic stability.

The MPC acknowledged that despite the recent declining trend, core inflation remains persistently high, and any uptick in food and energy prices could lead to an increase in inflation. Meanwhile, economic activity continues to gain traction, as reflected in high-frequency economic indicators. Additionally, pressures on the external account have emerged due to rising imports amid weak financial inflows. The MPC assessed the current real interest rate as adequately positive on a forward-looking basis to sustain macroeconomic stability.

Explaining the decision to keep the policy rate unchanged, the MPC noted that the current account deficit of $0.4 billion in January 2025—after months of surplus—combined with weak financial inflows and ongoing debt repayments, led to a decline in the SBP's foreign exchange reserves. Additionally, large-scale manufacturing output declined in the first half of FY25, despite a substantial 19.1% month-on-month increase in December 2024. Further, tax revenue shortfalls widened in January and February.

However, both consumer and business sentiments improved in recent months, the MPC noted. On the global front, heightened uncertainty due to escalating tariffs could impact global economic growth, trade, and commodity prices.

"In response to these developments, central banks in advanced and emerging economies have recently slowed the pace of their monetary easing," said the SBP governor in a press conference. Maintaining a cautious monetary policy is important to stabilise inflation within the target range of 5–7%.

Although high-frequency indicators—including automobile sales, POL products, cement, import volumes, private sector credit, and the purchasing managers' index—show that economic activity is strengthening, the MPC noted that the momentum depicted by these indicators has yet to fully reflect in large-scale manufacturing (LSM) data, which contracted by 1.9% in H1-FY25. The decline in LSM growth stems mainly from a few low-weight sub-sectors, which have offset positive momentum in key sub-sectors such as textiles, pharmaceuticals, automobiles, and petroleum products. Meanwhile, in the agriculture sector, recent satellite imagery indicates that risks to Rabi crops have subsided following recent rainfall.

The MPC expects economic growth to recover in the second half of FY25 due to easing financial conditions. The Committee maintained its earlier real GDP growth projection of 2.5–3.5% for FY25 and expects economic activity to gain further momentum.

The SBP governor stated that the current account recorded a deficit in January 2025, reducing the cumulative surplus to $0.7 billion for July–January FY25. Rising imports, driven by increased economic activity and higher global commodity prices, contributed to the deficit. However, strong workers' remittances and moderate export growth helped finance the elevated import bill. While net financial inflows remained weak due to lower-than-expected official inflows, the majority of debt repayments for the year have been completed. The MPC expects foreign exchange reserves to surpass $13 billion by June 2025 and stressed the need to strengthen external buffers amid global economic uncertainties.

In the fiscal sector, during the first half of FY25 showed improvement in overall and primary balances, supported by higher non-tax revenues and controlled expenditures. However, the Federal Board of Revenue (FBR) missed its tax collection targets for January and February 2025. The MPC cautioned that while the fiscal deficit is likely to remain within target, achieving the primary balance goal remains challenging. The Committee reiterated the need for fiscal consolidation and reforms to widen the tax base.

Broad money (M2) growth remained steady at 11.4% year-over-year, with a shift in composition as government borrowing increased while private sector credit (PSC) saw higher-than-seasonal net retirement. Despite this, PSC growth at 9.4% reflects easing financial conditions and economic recovery.