Editorial
The State Bank of Pakistan (SBP) made a significant move by reducing the discount rate by 100 basis points to 19.5 per cent. This decision, made in the context of a surge in headline inflation to 12.6 per cent in June 2024, up from 11.8 per cent in May 2024, is a key development in Pakistan’s economic landscape. The Monetary Policy Statement (MPS) acknowledged the risks associated with inflation stemming from fiscal slippages and ad hoc decisions related to energy price adjustments. The optimistic projection of fueling economic growth to between 2.5 and 3.5 per cent through lower interest rates and higher development spending seems unrealistic, especially given the continued rise in other costs such as utilities and transport.
While the MPS highlighted that core inflation has remained steady at around 14 per cent over the past two months, this rate contradicts the figures calculated by the Pakistan Bureau of Statistics, raising significant concerns about the accuracy of economic data. The committee also noted a few key developments, including a narrowing current account deficit and strengthening foreign exchange reserves to above 9 billion dollars by the end of June 2024.
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Simultaneously, Fitch upgraded Pakistan’s rating from CCC to CCC+, marking a positive development. However, it’s important to note that Pakistan remains in the speculative grade or very high credit risk category. This upgrade may not necessarily result in improved external borrowing rates.
Although the International Monetary Fund likely endorsed the reduction in the policy rate to send a positive signal to the market, there are significant doubts about whether these measures will bolster public confidence in the government’s economic policies. Given the potential impact of sustained protests on decision-making capacity, it’s crucial not to underestimate the challenges facing the country.
