Karachi, August 23, 2022 (PPI-OT): Pakistan Economy: MPS Review, A digression from tightening stance

Against our forecast of a 50bps hike, the central bank decided to keep the benchmark interest rates unchanged at 15% pointing out that domestic demand had started to moderate after 800bps cumulative rise in interest rates over the 9 months.

The central bank also pointed out to the proactive monetary policy it had adopted which was in contrast to the strategies adopted by other central banks in the region. The country had posted two successive years of high growth in the post pandemic era and had room for monetary tightening. The central bank remains confident that current monetary settings will help ease the overheating concerns in the economy by FY23 end and the real GDP growth will converge to its long-term path.

The ongoing monsoon spell poses risks to country’s growth aspirations and may induce another wave of inflationary pressures in the local commodity prices. The central bank is currently awaiting more data points but stands prepared in case more policy interventions maybe needed.

With ST external debt standing at only 6% of its total external debt position, the country is in a comfortable position regarding debt management and will not need to re-profile its debt. Also, the country’s gross borrowing needs are estimated ~US$33bn which will be easily met after total financing of US$37bn (including IMF), had already been arranged.

As for the key economic indicators, the central bank expects the headline growth for FY23 to settle around 3% – 4%, CPI inflation in the range of 18% – 20%, CAD ~3% of GDP and primary surplus 0.2% of GDP.