KASB Research – Monetary Policy Review

Dear Clients,

SBP maintains rate at 7% seeing visible growth momentum as FY21 GDP forecast gets widely vindicated

SBP remains accommodative by keeping the policy rate unchanged for the next two months, citing visible growth up-turn without compromise on external front and stabilization measures. Recent inflationary pressures are inextricably linked to a narrow set of contributors and the lingering impact of Feb’21 energy tariff hike. As Pakistan moved through the more virulent third COVID19 wave, the cost of normalization seems high currently amid continued fiscal consolidation.

Growth forecast rising to 3.94%: The positive momentum is largely abound in commodity producing sectors besides cyclicals and textiles and SBP expects it to carry over in FY22, stronger than initial forecasts. More favourable prospects are endorsed by new firm registrations and machinery imports amid well-calibrated and timely policies by SBP and government to help economic consolidation (read: low debt accumulation) while passing through the economic shock of COVID19. Both fiscal and primary balances have improved during Jul-Mar’21.

This year’s growth up-turn has not compromised the external stability where Current Account (+0.3% GDP) has remained in a surplus and central bank reserves have risen to 4-year high, which is endorsed by the international bond market’s welcome to Pakistan’s USD 2.5bn issuance. While exports growth has recently gained momentum from high value-added textile, imports have witnessed broad-based growth including capital goods and raw materials. Import growth in also exaggerated due to wheat and sugar imports which will likely taper off in the near term.

Remittance story has legs: Pakistan continues to witness record monthly remittance of USD 2.8bn (10MFY21: USD 24.2bn; +29% YoY), adequately cushioning rise in trade deficit. An SBP global survey of remitter suggests that nearly 70% of Non-Resident Pakistanis which remitted higher amounts in recently will continue to remit such amounts ahead. What has turned out to be surprisingly good for Pakistan is that 64% of active remitters that switched to digital modes of funds transfer during the pandemic wish to stick to formal channels, going forward.

RDA is barely scratching the surface: With more than USD 1bn in the diaspora proceeds via Roshan Digital Account, only 0.15mn (1.3%) accounts of 11.3mn NRPs are operational, putting RDA’s ideal potential at USD 81bn.

Looking under the hood of inflation: Bifurcating inflationary pressures, 75% of inflation since Jan’21 is due to the still-high food inflation and the electricity tariff hike in Feb’21 while core has only contributed to a rise of 0.5ppts. The SBP data suggests that the wage growth has stayed muted, pointing insignificant second-round effects from supply shocks to food and energy.

Strong growth guidance: Such growth without a high Current Account to GDP is a fundamental shift to how current economic environment will shoulder growth beyond FY21. Even though the real interest rate is negative, rates will go back gradually when COVID19 burden fizzles out. Continued positives from remittance growth and market-based exchange rate regime have been an automatic shock absorber. The medium-term inflation target for SBP continues to stand between 5-7%. The outcome of ongoing IMF discussions and upcoming Budget FY22 will be able to tell the tale more prominently.

Regards,
KASB Research

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