Policy rate expected to drop by 7% in 2024, says SBP

By Ajwad Ali | CEO Primarius Consultants

The State Bank of Pakistan (SBP) has projected that the policy rate, which is the benchmark interest rate for borrowing and lending in the country, will decline by 7% in the calendar year 2024, according to its latest Monetary Policy Statement (MPS).

The policy rate is currently at 22%, which is the highest in the region and among the emerging markets. The SBP has maintained this rate since July 2023, when it increased it by 2.5% to contain inflationary pressures and stabilize the exchange rate.

The SBP said that the policy rate will gradually decrease as inflation eases and the external and fiscal imbalances improve. The central bank expects inflation to fall from 29.4% in June 2023 to 12% by December 2024, and the current account deficit to narrow from 2.6% of GDP in FY23 to 1.5% of GDP in FY24.

The SBP also said that the approval of the International Monetary Fund (IMF) Stand-By Arrangement (SBA) in July 2023 has averted a balance of payments crisis and restored confidence in the economy. The SBA provides Pakistan with $6 billion in financial assistance over three years, conditional on implementing structural reforms and fiscal consolidation.

The SBP acknowledged that the economy faces significant challenges and risks, such as surging world commodity prices, global monetary tightening, recent catastrophic flooding, and domestic political uncertainty. It said that the government needs to continue its efforts to broaden the tax base, reduce the fiscal deficit, enhance the social safety net, and improve the business environment.

The SBP also urged the government to ease the import restrictions that have been imposed to conserve foreign exchange reserves, as they have adversely affected the industrial and service sectors, and dampened private investment and consumption.

The SBP said that it will continue to monitor the economic situation and adjust the policy rate accordingly, in line with its primary objective of maintaining price stability and supporting economic growth.

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