SBP to maintain policy rate as Pakistan is breaking loose from COVID-19 third wave amid feeble external pressures
We expect SBP to keep policy rate at 7% in the upcoming announcement on May 28’21 as Pakistan continues to battle the third wave of COVID-19. The trimmed infection rate from lockdown and Eid holidays has resurged to pre-holiday era. Also, external pressures remain feeble with Mar-end Current Account surplus of USD 959mn from record remittances. Pakistan’s re-entry in Eurobond market after 3.5years, attracting USD 2.5bn, has appreciated Pakistan’s import cover, leaving enough room to keep rates unchanged.
Current inflationary pressures are temporary: Despite volatile outruns in inflation from electricity tariffs and staple food imports, inflation lies near the higher end of SBP’s target range of 7-9% for FY21. The rise in electricity tariffs has continued to manifest in headline inflation, however, it has kept policy well-anchored to inflationary expectations. The recent print of core inflation (Urban 7.0%) is now near the policy rate, throwing some worry beads across while it is pertinent to note that SBP, like many central banks, has mostly stressed at the broad measure of inflation.
Pakistan has firmly batten down the hatches on external front: Despite a rise in imports for manufacturing activity in Pakistan, Current Account has remained in a surplus of USD 959mn during Jul-Mar’21 against a deficit of USD 4,147mn last year. Record remittances growth of 29% YoY to USD 24.25bn has been able to cushion the goods trade gap of USD 18.66bn (+18% YoY). This has put Pakistan in an attractive spot which has been largely endorsed by the Eurobond market where the USD 2.5bn was widely welcomed, enabling the creation of a buffer for an upcoming USD 2bn loan maturity in Oct’21.
Is 3% GDP growth really in the offing? Economic recovery has been underway buoyed by supportive monetary policies by SBP during the pandemic, where Large Scale Manufacturing (LSM) print for Mar’21 shows remarkable improvement of 22% YoY. The numbers of output gap recovery in the upcoming announcement besides SBP’s communique on recovery of slack in the economy will set the expectations of growth ahead.
The upcoming budget is on everyone’s radar at the moment as the incumbent government moves towards growth oriented policies from past 3 year struggle of sustainable developments. We believe the next year growth target of 4-5% will be guided by agricultural reforms, infrastructure and construction activity, and exports expansion. This puts cyclicals in a soft spot dispelling likelihood of massive rate hikes in the next 12-18 months.