Is it too early to celebrate the cut in the policy rate? 

Central bank cites positive indicators, but experts warn of underlying challenges

As the State Bank of Pakistan (SBP) Governor announced a significant 200 basis point cut in the policy rate, bringing it down to 17.5%, his composed demeanour reflected growing confidence in Pakistan’s improving economic indicators. However, beneath this veneer of optimism lies a complex reality: while progress is evident, the nation is not yet fully out of troubled waters.

A measured step toward economic stability

The decision to lower the policy rate stems from a cautiously optimistic view of Pakistan’s economic landscape. Recent developments point to progress in stabilizing the economy, with signs of potential sustainable growth on the horizon. A key factor driving this optimism is the assessment that underlying inflationary pressures are subsiding, a result of the previously tight monetary stance and ongoing fiscal consolidation efforts.

Notably, the pace of disinflation has surpassed expectations, partly due to delayed adjustments in gas and electricity prices. The international oil market has also seen favorable movements, though there’s an acknowledgment of the inherent uncertainty in these developments.

Several key economic indicators have shown improvement in recent months. Inflation has fallen more sharply than anticipated, providing relief to consumers and businesses alike. The SBP’s foreign exchange reserves have maintained stability at $9.5 billion, a positive sign given the weak official foreign exchange inflows and ongoing debt repayments.

Government securities’ secondary market yields have seen significant decreases, indicating growing investor confidence. Business sentiment has also shown improvement, although consumer confidence has seen a slight decline. It’s worth noting that FBR tax collection during July-August 2024 fell short of the target, highlighting ongoing fiscal challenges.

 

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Ahtasam Ahmad
Ahtasam Ahmad
The author works as an Editorial Consultant at Profit and can be reached at [email protected]

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