Discount rate remains unchanged
Consumer price index (CPI), or headline inflation, reported to be the prime determinant of the discount rate, has been declining since November 2024 — from 4.9 percent, to 4.1 percent in December, 2.4 percent in January, 1.5 percent in February, 0.7 percent in March and 0.3 percent in April.
The MPC reduced the discount rate to 13 percent on 16 December, 12 percent on 12 January and 11 percent on 5 May even though the decline in CPI was much sharper during these months than previously.
True that CPI rose to 3.5 percent in May and declined to 3.2 percent in June this year; however, the rate has been kept unchanged since May, indicating that the CPI may not be the primary determinant of the discount rate. Core inflation has also been steadily declining since March this year — from 8.2 percent to a low of 6.9 percent in June.
The Monetary Policy Statement (MPS) noted that high frequency economic indicators were depicting a global economic recovery (and not just in Pakistan) — a stance that is clearly at odds with the International Monetary Fund (IMF). According to the IMF, 'forecasts for global growth have been revised markedly down compared with the January 2025 World Economic Outlook (WEO) Update, reflecting effective tariff rates at levels not seen in a century and a highly unpredictable environment.' The MPS further claimed notable year-on-year growth in automobile sales, fertilizer off-take, credit to private sector, imports of intermediate goods and machinery — sales and purchases that are not indicative of higher output, but a decline in inventories while post-Trump's inauguration the dollar lost value against all major currencies except the rupee, which accounts for lower import costs.
The MPS makes reference to purchasing manager's index in recent months for the first time which begs the question as to how it is calculated. One may assume that it is part of the technical assistance (TA) extended by the IMF to Pakistan to deal with 'important shortcomings that remain in the source data available for sectors accounting for around a third of GDP while there are issues with the granularity and reliability of the Government Finance Statistics (GFS).' The September IMF documents note that the TA will support government efforts to improve GFS and formulate a new Producer Price Index. It is relevant to note that Business Recorder was informed by the Pakistan Bureau of Statistics that the TA began in July 2025 and will not be completed till end June 2026.
The MPC appeared to be unaware of the fact that the large-scale manufacturing (LSM) growth was at negative 1.52 percent July-April 2025 (the most recent data released) against 0.26 percent in the comparable period of the year before; private sector credit rose from 323.5 billion rupees in 2023-24 to 676.6 billion rupees July-June 2024-25 with the rise associated with the stock market rather than the LSM. And maintained that barring flood-related risks agriculture sector is expected to recover in the current year — a risk that compromised the target last year and the recent ongoing floods may well belie this optimistic projection.
In relation to the discount rate decisions taken by the MPC it is appropriate to cite the observation by the IMF in its May 2025 documents uploaded on its website titled the first review under the extended arrangement: 'while the reduction in headline inflation has been impressive, core inflation remains elevated, and the SBP should continue to calibrate monetary policy carefully, removing monetary constraint gradually and contingent on clear evidence that inflation is firmly anchored within SBP's target range'.
In other words, the decision to remove monetary constraints on repatriation of profits under contractual obligations (in spite of reserves on 18 January cited at USD 14,456.6 million though the Governor SBP noted during his press conference that rollovers account for USD 16 billion) may be the primary reason for the Fund staff not to give the green light to the MPC to reduce the discount rate.
The Governor SBP held a press conference after the MPC meeting, which must be appreciated as it is in line with the Fund recommendation to undertake effective communication 'as it will help the public better understand the MPC's reaction function and build support for policy decisions.' Sadly, it is fairly obvious that he failed to convince the naysayers in the industrial community that the decision to keep the rate unchanged was an appropriate one.
The central bank seems to have taken a cautious approach with a view to ensuring price stability amid a surge in energy prices that has worsened the inflation outlook.
Copyright Business Recorder, 2025
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
a day ago
- Business Recorder
China's July factory-gate prices miss forecast, deflation concerns persist
BEIJING: China's producer prices fell more than expected in July, while consumer prices were unchanged, underscoring the impact of sluggish domestic demand and persistent trade uncertainty on consumer and business sentiment. Factory-gate prices have been declining for more than two years, and Saturday's data suggest early-stage efforts to tackle price competition have yet to yield significant results. Deflationary pressures have prompted Chinese authorities to address overcapacity in key industries. However, the latest round of industrial restructuring appears to be a pared-down version of the sweeping supply-side reforms launched a decade ago that were pivotal in ending a deflationary spiral. The producer price index (PPI) fell 3.6% year on year in July, National Bureau of Statistics (NBS) data showed on Saturday, missing economists' forecast of a 3.3% slide and matching the near 2-year low recorded in June. Extreme weather and global trade uncertainties contributed to price declines in some industries, Dong Lijuan, NBS chief statistician, said in a statement. However, on a month-on-month basis, PPI shrank 0.2%, improving from June's 0.4% drop. Despite the headline figures, some analysts see signs of easing deflationary pressure. Xing Zhaopeng, senior China strategist at ANZ, pointed to improvements in month-on-month PPI and year-on-year core CPI. He expects the current 'anti-involution' policy measures - aimed at curbing disorderly competition in sectors like autos -to begin lifting year-on-year PPI from August. Still, other analysts remain cautious, noting that without demand-side stimulus or reforms to improve people's welfare, the measures may have limited impact on final demand. A prolonged housing downturn and fragile trade relations with the U.S. also continue to weigh on consumer spending and factory activity. China's consumer price index (CPI) was flat year-on-year in July, compared with a 0.1% rise in June, NBS data showed, beating a Reuters poll forecast of a 0.1% slide. Core inflation, which excludes volatile food and fuel prices, was 0.8% in July from a year earlier, the highest in 17 months. Food prices fell 1.6%, following a 0.3% decline in June. Extreme weather added to the economic strain, with sweltering heat gripping much of China's eastern seaboard last month and heavier-than-usual downpours lashing the country with the East Asian monsoon stalling over its north and south. On a monthly basis, the CPI edged up 0.4%, against a 0.1% drop in June and exceeding forecasts for a 0.3% rise. 'Nonetheless it is still unclear if this is the end of deflation in China,' said Zhiwei Zhang, chief economist at Pinpoint Asset Management. 'The property sector has not stabilized. The economy is still supported more by external demand than domestic consumption. The labour market remains weak,' he said.
Express Tribune
a day ago
- Express Tribune
IMF social spending goal missed
Listen to article Pakistan narrowly missed the International Monetary Fund's (IMF) target to spend at least Rs2.86 trillion on improving poor health and education standards, as Sindh, Khyber- Pakhtunkhwa (K-P), and Punjab fell short of their commitments. Education spending appeared to be a low priority, despite one in four children being out of school and half of grade-five students unable to read grade-two Urdu stories. Against the target of Rs2.863 trillion, the federal and four provincial governments spent Rs2.84 trillion in the last fiscal year, missing the mark by Rs27 billion, according to government sources. Compared to the targets in the memorandums of understanding (MOUs) signed by all five governments, expenditures were Rs240 billion lower than commitments. Sindh, Khyber-Pakhtunkhwa, and Punjab missed their targets by wide margins, while the federal and Balochistan governments exceeded theirs. Poor administrative structures and low absorption capacity were cited as major reasons for the shortfall. The IMF set quarterly and annual ceilings to ensure health and education spending was not sacrificed for meeting other conditions such as cash surpluses and budget balances. In May, Pakistani authorities assured the IMF they would work to improve provincial capacity in these sectors. The IMF's staff report stated that Pakistan's health and education spending has declined since 2018. All governments had aimed for a modest increase in spending to 2.4% of GDP, but execution fell short, particularly in Sindh and Khyber-Pakhtunkhwa, due to absorption issues. The IMF's annual target was missed despite higher spending in the last quarter. Against a quarterly target of Rs713 billion, the five governments spent Rs937 billion in April-June, which was nearly one-third more than planned. However, this late surge failed to offset shortfalls from the first three quarters. Authorities had acknowledged the decline in non-Benazir Income Support Programme (BISP) health and education spending in recent years and committed to gradually increasing it as a share of GDP over the three-year IMF programme. Compared to internal budgetary targets, the federal government spent Rs261 billion on health and education against a Rs248 billion target. Punjab fell Rs35 billion short, spending Rs1.15 trillion in total. Provincial Information Minister Azma Bukhari said Punjab's health budget was Rs524.8 billion, with Rs505 billion actually spent — 96% of the target. Education spending was targeted at Rs664 billion but stood at Rs649 billion, or 98% of the goal. Sindh, under the government of Chief Minister Syed Murad Ali Shah, fell Rs153 billion short, spending Rs670 billion against a target of Rs853 billion, said the sources. Provincial governments often favour large infrastructure projects with more visibility to voters over softer social spending targets. Khyber-Pakhtunkhwa spent Rs545 billion on health and education compared to the Rs600 billion target, missing by Rs55 billion. Balochistan, however, exceeded its target by Rs25 billion, spending Rs206 billion. A recent World Bank report for the "Actions to Strengthen Performance for Inclusive and Responsive Education" programme said Pakistan still struggles with equitable access to education, with significant disparities across levels and genders. The gross intake ratio in grade one is 91%, with disparities between males and females. Transition rates from primary to middle school are 83%, and from middle to secondary school, 92%, according to the World Bank. However, the gross enrollment rate drops sharply from 78% at primary level to 22% in higher secondary education, highlighting retention issues. Out-of-school children remain a major concern, with 26.1 million, or 38% of the school-age population, not attending school in 2022-23. Gender disparities worsen at higher education levels, and rural areas are hardest hit, accounting for 74% of out-of-school children. For girls, lack of access is a critical barrier. Despite progress in enrolment, earning outcomes remain low, with national assessments showing a decline in foundational literacy and numeracy (FLN). In 2023, only 50% of grade-five students could read a grade-two story in Urdu or Sindhi, down from 55% in 2021. English literacy also slipped, with just 54% of grade-five students able to read simple sentences, compared to 56% in 2021. Numeracy skills also worsened. World Bank publications on health sector loans show a similarly troubling picture. Although Pakistan has seen improvements in health outcomes over the past decade, it is unlikely to meet most 2030 health-related Sustainable Development Goals (SDGs) at the current pace. Life expectancy has improved but remains among the lowest in South Asia. Progress in reproductive, maternal, and child health is also inadequate, and Pakistan remains one of only two countries where polio is endemic.
Business Recorder
2 days ago
- Business Recorder
July workers' remittances rise 7.4pc YoY
KARACHI: Workers' remittances maintained their growth momentum in the new fiscal year (FY26), rising 7.4 percent year-on-year in July, reflecting sustained inflows from overseas Pakistanis. The State Bank of Pakistan (SBP) on Friday reported that Pakistan has received inflows of workers' remittances amounted to $3.214 billion during July 2025 as against $2.994 billion in July 2024, showing an increase of $220 million. However, home remittances in the first month of this fiscal year remain some 5.6 percent lower than June 2025, in which the country received inflows worth $3.406 billion. During the last fiscal year, workers' remittances remained instrumental as they more than offset the widening trade deficit. Workers' remittances posted a robust growth of 27 percent in last fiscal year (FY25) over the previous fiscal year (FY24). Overall, Pakistan received highest ever $38.3 billion home remittances during FY25 as against $30.25 billion in FY24. Workers' remittances remained instrumental, as they more than offset the widening trade deficit. Governor SBP, Jameel Ahmed, expressed confidence that home remittances will continue to grow in the current fiscal year. However, he noted that the pace of growth is expected to slow in the coming months due to the high base effect and the recent rationalization of home remittance incentive schemes. According to the SBP Governor, the target for home remittances in the current fiscal year has been set at $40 billion, compared to $38.3 billion achieved in the previous fiscal year. Remittance inflows in July 2025 were led by Saudi Arabia, which contributed $823.7 million, an increase of 8.4 percent. Inflows from the United Arab Emirates (UAE) rose 8.8 percent to $665.2 million in the first month of this fiscal year, compared to $611 million in the same month last fiscal year. Remittances from the United Kingdom (UK) grew two percent to $450.4 million in July 2025 up from $443 million in July 2024. However, inflows from the United States of America (USA) fell 10 percent to $269.6 million in the first months of FY26. Copyright Business Recorder, 2025
