SBP chief underscores over Rs1tr savings due to rate cut

• ADB will disburse $500m to Pakistan soon, says SBP governor.
• Monetary policy flexible enough to handle 10-15% shift in oil prices.
• Jameel Ahmed underscores reduction in govt's interest expense.

KARACHI: State Bank of Pakistan (SBP) Governor Jameel Ahmad has said that the reduction in the government's interest expense leads to total savings of Rs1.3 trillion which amounts to around 1% of gross domestic product (GDP), The News reported on Tuesday.

Speaking at an analyst briefing, the SBP governor noted that the government's total interest expense for the fiscal year 2025 is now estimated to be Rs8.5 trillion, compared with Rs9.8 trillion projected in the budget for the current fiscal year and that savings will aid in controlling the fiscal deficit for FY25.

His remarks come after the central bank, on Monday, slashed the key policy rate by 250 basis points (bps) to 15%, at least 0.5% more than the market expectations, marking its fourth consecutive cut as inflation remains in single digits through October.

Noting that the current monetary policy has sufficient flexibility to manage fluctuations of 10-15% in oil prices and other commodities, Ahmad said that the reduction in interest rates and the timely use of surplus funds for debt profiling is expected to significantly lower the government’s debt servicing costs in FY25.

He further said that the Asian Development Bank (ADB) was likely to disburse around $500 million to Pakistan soon, which will increase the forex reserves to more than $11.5 billion.

He also projected that the reserves could reach $13 billion by June 2025.

Pakistan is expected to receive $500 million in loans from the Asian Development Bank (ADB) in the coming weeks, which will help boost the country’s foreign exchange reserves, said the central bank’s governor.

Meanwhile, analysts present at the briefing noted that the governor highlighted a positive trend in Pakistan's external position during the first four months of the current fiscal year.

He expects this trend to continue, with remittances for October estimated to exceed $3 billion. This development is anticipated to reduce the current account deficit to a negligible level for the July-October period.

The current account recorded a surplus for the second consecutive month in September 2024, reducing the cumulative deficit to $98 million in the first quarter of FY25. Despite a significant increase in imports, strong workers’ remittances and higher exports have helped contain the deficit.

Additionally, the receipt of the first tranche under the International Monetary Fund (IMF) loan programme contributed to the increase in SBP's reserves, which reached $11.2 billion as of October 25. Furthermore, the SBP purchased $1.3 billion from the interbank forex market in June and July to bolster reserves and repay external debt.

The SBP reiterated that the debt repayments for FY25 total $26.1 billion, slightly down from the previous estimate of $26.2 billion due to interest expense adjustments. Over the next eight months, the government must pay $6.3 billion; the remainder will likely be rolled over or refinanced.

While responding to a question regarding the funding gap mentioned in the IMF staff report, the governor stated that, after filling that gap, the Pakistan case was forwarded to the IMF's board. As a result, there is currently no funding gap during the IMF programme.

According to the SBP, the overall debt stock has decreased, and the composition of the debt has improved. The total external debt has fallen from $100 billion at the end of FY22 to $98.3 billion by the end of FY24. Additionally, the maturity profile of these debts has improved, largely due to a higher share of multilateral debts.

The domestic debt profile has also seen positive changes, with the share of short-term treasury bills decreasing to 21% in the first four months of FY25, down from 24% at the end of FY24. Authorities expect this figure to drop below 20% by the end of FY25.

The central bank believes that continued fiscal consolidation will positively impact debt sustainability. In the first quarter of FY25, both the fiscal and primary balances recorded surpluses of 1.4% and 2.4% of GDP, respectively. This improvement can largely be attributed to record-high profits from the SBP, which significantly boosted non-tax revenues. However, the Federal Board of Revenue’s tax collection fell short of targets during the July-October period, as noted in the SBP's monetary policy statement.

It is to be noted that since June, the SBP has lowered interest rates by a total of 700 bps over four straight cuts.

Inflation has decreased more quickly than anticipated and is now close to the SBP’s medium-term target range in October. As a result, the SBP's Monetary Policy Committee decided to deliver an aggressive rate cut, surpassing market expectations, which had anticipated a reduction of 200 bps.

"The Committee viewed the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5 – 7% target range," said the bank in a statement.

"This will also support macroeconomic stability and help achieve economic growth on a sustainable basis," it added.

Pakistan's macroeconomic conditions have improved, but many economists believe that the current recovery is neither sustainable nor sufficient, as economic vulnerabilities remain high.

For a robust economic recovery in the medium term, a comprehensive reform programme must be consistently implemented. In September, the IMF approved a 37-month $7 billion Extended Fund Facility programme, providing much-needed support to Pakistan’s struggling economy.

The SBP anticipates that real GDP growth for FY25 will exceed previous projections while remaining within the range of 2.5% to 3.5%. The IMF forecasts the country’s economy to grow 3.2% in FY25.

Regarding inflation, the SBP expects it to remain relatively low due to several favourable factors, including improved supply of key food commodities, decreasing oil prices, and base effects. Pakistan’s headline inflation stood at 7.2 in October, compared with 6.9% in the previous month.

The SBP forecasts that average inflation for FY25 will be below its earlier projected range of 11.5% to 13.5%. The exact inflation projection will be disclosed in January next year. Analysts expect inflation to be around 7% to 8%, while the IMF projects inflation to be 9.5% for this fiscal year.

"We believe that SBP will continue rate cuts, albeit at a very slower pace from now onwards, as it has already brought the policy rate down by 700 bps from the peak of 22% in April/May 2024,% said Alfalah Securities in a note.

"Real interest rates are still high (7.8% as per October inflation reading), which indicates potential rate cuts going forward as well," it added.

Meanwhile, expressing his views on the policy rate cut, Prime Minister Shehbaz Sharif said that the move will enhance business activities, exports and employment opportunities in the country.

Presiding over a meeting of the Parliamentary Party of Pakistan Muslim League-Nawaz (PML-N) here in Islamabad on Monday, he said the economy of Pakistan is becoming stable.

He said the SBP has reduced the policy rate by 250 points. He said following the decrease of 250 points, the reduction of policy rate from 17 5 to 15 is welcoming. The PM said inflation has scaled down from 38 percent to 7% while the trust of the national and international institutions are testament to the stability of the country’s economy.

He said the nefarious designs of those who want to spread chaos and bring the country to the brink of bankruptcy witnessed failure. He said history will always remember those in golden words who sacrificed their politics for the survival of the country.

When the historian will write the history, he will clearly write about the well-wishers of the country and about those who wrote letters to the IMF to stop giving loans, he remarked.

The premier said a new chapter has been added to Pakistan-Saudi investment partnership during the recent visit to Saudi Arabia. He said in the Future Investment Initiative, a detailed discussion was held with the Saudi leadership especially Saudi Crown Prince Mohammed bin Salman.

He said Saudi Arabia is a long-lasting friend and partner of Pakistan. He said the Saudi leadership assured all kind of support for the stability and development of Islamabad's economy.

The prime minister informed the PML-N Parliamentary Party that during his visit to Qatar the Qatari leadership also assured increase of investment in Pakistan.

He said talks were held for giving practical shape to the projects worth $3 billion of Qatari investment in Pakistan.

He said Qatar will invest in various sectors including aviation, hoteling, Information Technology and energy sectors in Pakistan.

PM Shehbaz noted that the government is taking steps on priority basis to facilitate investment and increase foreign investment in Pakistan. He said reform agenda is being implemented in every sector of the country.

He said the Federal Board of Revenue (FBR) has been directed to honour such people who pay taxes as they are ambassadors of Pakistan.

Separately, the prime minister also apprised the cabinet members of the outcome of his recent successful visits to the Kingdom of Saudi Arabia and the State of Qatar, terming these successful and productive.

The PM, while addressing the cabinet meeting, said that he held very productive and useful consultations with the leadership of KSA and Qatar wherein different subjects like solar energy, mines, minerals and IT sectors were thoroughly discussed during the bilateral meetings.

He said a delegation of Qatar Investment Authority would soon visit Pakistan as Qatar had announced to invest $3 billion in Pakistan, adding Saudi Crown Prince Mohammed bin Salman, during a meeting, had told him that there was immense potential of Information Technology (IT) trained people and asked him to send the skilled people from Pakistan to the Kingdom since they required it.

Amir of Qatar also hinted at setting up an IT park in Pakistan, he added. The prime minister said whereas Pakistan and Azerbaijan had also agreed to enhance the bilateral investment to $2 billion in diverse areas.

He said the understanding between the two countries was reached during a visit of Azerbaijan President Ilham Aliyev in the shape of the signing of agreements and memorandums of understanding (MoUs).