The State Bank of Pakistan (SBP) is set to hold a meeting of its Monetary Policy Committee (MPC) on September 20, 2021. This meeting, scheduled for the first time since March 2020, is significant as it coincides with global economic uncertainties and the impact of the delta variant of COVID-19. The committee will announce its policy rate, a decision that holds particular importance given the current economic scenario.
Recent surveys indicate mixed expectations regarding the MPC’s decision. A poll by Topline Research suggests that around 65% of financial market participants anticipate the maintenance of the current policy rate at 7% to support economic growth. Pakistan’s economy has shown a growth rate of 4% following a contraction of 0.4% the previous year. Mustafa Mustansir, head of Research at Taurus Securities, noted the lack of strong demand-side pressure in the market. Similarly, a survey by the Policy Research Unit (PRU) found that 84% of participants do not expect a change in the policy rate in the upcoming meeting. Contrasting these expectations are the current macroeconomic indicators. The Pakistan Bureau of Statistics (PBS) released data showing a significant increase in the country’s trade deficit, which has reached $7.5 billion in the first two months of the fiscal year 2021-22, a 120% rise compared to the same period last year. This deficit is mainly attributed to the government’s accommodative policies, which have led to a 26% increase toward the annual target of $28.4 billion set in the fiscal budget 2021-22. Although exports have grown by 28%, reaching $4.6 billion, imports have surged by 73% to $12.1 billion, overshadowing the gains from exports.
Moreover, despite a free-float currency mechanism, Pakistan’s exports have not shown competitive strength in the global market. The country has experienced a decline in exports for three consecutive months and a 39% depreciation of the currency over the past three years, but export levels remain around $2 billion per month. In contrast, imports have been increasing, with a notable 95% rise in the previous month. The SBP’s forex reserves stand at around $20 billion, but the Pakistani rupee has depreciated significantly, reaching a low of 168.95 against the US dollar. This trend continues despite the high reserves, as the SBP has avoided intervening in the forex market, in line with the IMF program requirements.
As the MPC meeting approaches, some market participants (about 10%) expect a rate hike of 50 basis points to counter inflation. Analysts at Topline Securities anticipate a smaller increase of 25 basis points, addressing vulnerabilities in the current account and inflationary pressures. Conversely, a segment of the business community argues for a reduction in the policy rate, noting that the core inflation rate has decreased to 6.3% in August. The decisions made in the upcoming MPC meeting are thus critical in the context of these varied economic indicators and market expectations. They will shape the direction of Pakistan’s monetary policy in an environment balancing the need for economic growth and the challenges of inflation and a widening trade deficit.
