The Monetary Policy Committee (MPC) of the State Bank of Pakistan, in its meeting on March 10, 2025, decided to keep the policy rate unchanged at 12 percent. The decision was influenced by lower-than-expected inflation in February 2025, primarily due to a drop in food and energy prices. However, the MPC noted the persistent elevated level of core inflation and the potential for food and energy prices to rise again. Economic activity is showing signs of recovery, but there are pressures on the external account due to rising imports and weak financial inflows.
Key Developments:
Current Account: Turned into a deficit of $0.4 billion in January 2025 after a surplus in previous months, leading to a decline in foreign exchange reserves.
Manufacturing: Large-scale manufacturing output declined in the first half of FY25, despite a monthly increase in December 2024.
Tax Revenues: Shortfall in tax revenues widened in January and February 2025.
Global Uncertainty: Increased due to ongoing tariff escalations, affecting global economic growth, trade, and commodity prices.
Real Sector:
Economic activity is gaining traction, as indicated by high-frequency indicators like automobile sales, POL products, cement, and credit to the private sector. However, large-scale manufacturing data has not fully reflected this momentum, contracting by 1.9 percent in H1-FY25. The agriculture sector shows reduced downside risks to Rabi crops after recent rainfalls. The MPC maintains its real GDP growth projection of 2.5 - 3.5 percent for FY25.
External Sector:
The current account deficit in January 2025 was driven by a broad-based acceleration in imports, though robust workers' remittances helped finance the elevated imports. The MPC expects the current account balance to be around 0.5 percent of GDP for FY25. Foreign exchange reserves are projected to reach above $13 billion by June 2025.
Fiscal Sector:
The fiscal accounts for H1-FY25 show improvement in both the overall and primary balance, driven by increased revenues and contained expenditures. However, meeting the primary balance target remains challenging. The MPC emphasized the need for fiscal consolidation and reforms to widen the tax base.
Money and Credit:
Broad money (M2) growth remained stable at 11.4 percent year-on-year. Private sector credit growth is significant at 9.4 percent, reflecting eased financial conditions and economic recovery.
Inflation:
Headline inflation declined to 1.5 percent year-on-year in February 2025, driven by lower food and energy prices. Core inflation remains elevated. The MPC expects inflation to stabilize within the target range of 5 - 7 percent, though risks remain from food price volatility, energy price adjustments, and global commodity price uncertainties.
Overall, the MPC emphasized the importance of maintaining a cautious monetary policy stance to sustain macroeconomic stability and achieve sustainable economic growth.
https://www.sbp.org.pk/m_policy/2025/MPS-Mar-2025-Eng.pdf
