Karachi, January 25, 2022 (PPI-OT): SBP maintains status quo till Mar-2022
Sticking to its forward guidance from Dec-2021, SBP has decided to keep policy rate unchanged until next Monetary Policy Statement (MPS) announcement in Mar-2022 as it looks towards moderation in the economic activity and the yawning Current Account Deficit (CAD) besides fiscal consolidation which is expected to stabilize macro imbalances.
The Monetary Policy Committee (MPC) has also turned away from the mantra of gaining traction towards mildly positive real interest rates, citing monetary and fiscal policy mix, after the recently approved Finance Bill 2021, will achieve the desired growth stabilization, despite high near-term inflation, and positive primary balance.
Even though MPC has shrugged off the recent pressures from oil prices by trying to look through the oil import bill, showcasing a non-oil Current Account Surplus for Pakistan, as the IMF program resumption is likely by end of Jan-2022 which will enable Pakistan fund external requirements.
Policy rate has been kept unchanged
SBP has kept the policy rate unchanged at 9.75% as it stuck to its forward guidance from Dec-2021. Most of the pace of economic momentum has stabilized over the last couple of months as the High Frequency Indicators, Cement sales, POL sales, etc. are moderating. This is also corroborated by deceleration in LSM growth to 3.3% during Jul-Nov2021, which is partially due to high base effect.
The pace of yawning CAD has also declined despite highest monthly prints in Nov-2021 and Dec-2021, during which oil and vaccine imports have kept the import bill at elevated levels. SBP is now looking through the non-controllable oil import bill, excluding which, Pakistan will likely be able to post a non-oil Current Account Surplus.
Fiscal policy corroborates monetary settings
The MPC communique highlighted, inflationary pressures will remain high in the near term backed by base effect, energy tariff hikes and mini-Budget 2021. The sequential movement in perishable food items has slowed down the MoM trajectory of inflation while YoY print will remain high. This base-effect also points towards an improved inflation outlook for FY23.
Resultantly SBP has turned away from its previous mantra of moving towards mildly positive real interest rates. This puts shifts in monetary stance at the back seat as the fiscal consolidation from the recently approved Finance Bill 2021 brings a fine balance to the monetary and fiscal policy mix, that will enable Pakistan in achieving the desired growth stabilization and a positive primary balance.
IMF and external funding ahead
Oil prices have been on a rising trend from threefold impact of low inventories, low spare production capacity and low investments. Needless to mention, monetary policy settings do not impact the ballooning oil import bill for Pakistan.
SBP’s move to look though oil import bill while maintaining the policy stance from previous MPS announcement leads us to a positive notion that IMF program resumption will happen by the end of Jan-2022. This effectively implies that external funding, from IMF program disbursements, Sukuk and Eurobond issuances as well as multilateral and bilateral loans, will bring FX reserves to an adequate import cover level and enable Pakistan in riding out the storm of triple-digit oil prices in the near-term.