Inflation drops, policy rate cut as Pakistan eyes economic recovery

January 28, 2025 (MLN): Inflationary pressures in Pakistan, which peaked during FY2023, have significantly eased in FY2024, paving the way for economic recovery, according to the Government of Pakistan, Finance Division, Economic Adviser’s Wing.

The decline, driven by effective policy measures, falling global commodity prices, and exchange rate stability, has created room for monetary easing, including a substantial 1000 basis-point policy rate reduction.

This shift is expected to bolster economic momentum, providing a more favorable environment for industrial growth and consumer activity in the coming months.

Urban food inflation dropped sharply to 2.7% in H1-FY2025 from 33.2% last year, while rural food inflation fell to 0.4%, driven by improved domestic supplies and lower global food prices, the report added.

Month-Wise CPI Inflation, Jul-Dec

Non-food inflation also declined significantly, with urban at 13.2% and rural at 10.0%, supported by falling energy costs, a stable exchange rate, and reduced petroleum prices since May 2024.

In H1-FY2025, urban inflation was higher at 8.7% compared to rural inflation at 5.1%, with urban areas impacted by wage pressures and non-food inflation, while rural areas benefited from improved agricultural output.

Inflationary pressures rose significantly, as evidenced by the Wholesale Price Index (WPI), dropping to 4.4% from 25.4% and the Sensitive Price Indicator (SPI) falling to 9.4% from 31.6%, indicating stabilization across wholesale and retail markets, the report highlighted.

Monetary Policy

Pakistan's monetary policy saw a significant shift in FY2025, with the State Bank reducing the policy rate by 1000 basis points to 12% by January 2025, aiming to boost economic activity and business confidence.

This accommodative stance is expected to support a sustainable recovery and counteract the subdued growth observed in earlier quarters, fostering macroeconomic stability moving forward.

Broad money (M2) contracted by 0.8% in H1-FY2025, compared to a 4.5% increase in the previous year, driven by mixed trends in Net Foreign Assets (NFA), the report noted.

The State Bank of Pakistan (SBP) NFA rose by Rs652 billion, while scheduled banks' NFA declined by Rs28bn.

Net Domestic Assets (NDA) declined by Rs. 923 billion in H1-FY2025, with government borrowing for budgetary support showing a net retirement of Rs2,247bn, reflecting efforts to reduce fiscal deficits.

Private sector credit surged to Rs. 2,090 billion, driven by a significant rise in loans to businesses, which reached Rs1,916bn, up from Rs443bn last year.

Loans to Private Sector Businesses - by type of Finance (Rs bn)

Private sector credit revival, fueled by robust financial inflows, reduced government borrowing, and a favorable policy environment, signals a resurgence in business expansion and growing confidence in the economy's near- to medium-term outlook.

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