FY25 looks rosy with GDP 2.5-3.5%, reserves $13bn

July 29, 2024 (MLN): A not long time ago teetering on the brink of default, Pakistan has now made a notable turnaround. The outlook for FY25 is looking increasingly promising with GDP growth of 2.5-3.5%, SBP reserves $13 billion, and a current account deficit of 0-1.0% of GDP while the inflation target is set at 11.5-13.5%.

Foreseeing further improvements in Pakistan’s macroeconomic outlook, SBP Governor Jameel Ahmed during the post-MPC Analyst Briefing shared some promising projections for FY25, including repayments which are projected at $26.2bn, with a rollover amount of $16.3bn, leaving a repayable amount of $10bnn.

In July 2024, $1.1bn was already repaid, with $9bn remaining over the next 11 months.

Not to forget that the country is happily progressing after taking the bitter pills of IMF conditions and securing the $7bn EFF program.

Consequently, macroeconomic indicators have improved as a prolonged period of tight monetary policy has successfully cooled down inflation, which created room for the State Bank of Pakistan (SBP) to loosen the reins of the economy by gradually lowering interest rates.

In today’s MPC meeting, the central bank reduced rates for the second time in a row by 100bps to 19.5% in line with the market expectations.

The governor also informed that there are no pending profit repatriation payments left.

The SBP is not targeting any specific real interest rate but has a medium-term target of 5-7%. Inflation has come down and, despite slight fluctuations, is expected to continue declining.

The time lag for SBP interest rate adjustments to fully impact the economy is 6-8 quarters, he added.

He also clarified that currently SBP is not restricting any import. 

Today’s decision to cut the interest rate was on the back of improved inflation in June 2024 along with SBP's FX reserves that have surged to over $9bn despite debt repayments, a narrower current account deficit, and a IMF deal.

The MPC was of the view that despite today’s rate cut, the monetary policy remains tight enough to steer inflation towards the 5-7% target, depending on fiscal consolidation and structural reforms.

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