Finance Minister Muhammad Aurangzeb on Wednesday expressed hope that the State Bank of Pakistan (SBP) will lower core inflation this year.
The comments came after a Reuters poll of market watchers said the SBP was expected to cut its key interest rate by 100 basis points (bps) next week after cutting it by a record 22pc in seven key meetings.
Speaking at the Pak-China Business Forum in Shenzhen, the finance minister said the country’s currency was stable “on the back of administrative measures and structural changes”.
It was also noted that the inflation pressure was higher at 11 percent, up from the market consensus of 14 percent.
Acknowledging that the policy rate is at the discretion of the central bank, Aurangzeb said, “We expect deflation policy to begin to decline in line with inflation because we have a sufficient level of real positive interest rates; must be maintained.”
“Now the market has reacted positively, we have seen foreign purchases coming in the exchange; At the same time, we have seen the institutional flow of stable income back to Pakistan,” he said.
The minister also spoke of what he called the country’s “road to market” strategy, with “three key areas”: export-oriented growth, foreign direct investment (FDI) and access to international capital markets.
The finance minister said they are looking to tap into the “Chinese capital market” and are preparing for an unprecedented panda bond issue in Pakistan. “We are going to contact the regulatory authorities here in China because they will follow the same structure that the Egyptian government followed last year.”
Earlier, Pakistan said it wanted to raise $300 million in Panda bonds, tapping China’s bond market and raising the country’s credit rating.
A delegation of more than 100 businessmen and companies from Pakistan attended the event, looking for business opportunities a day before the annual budget.
On foreign reserves, Aurangzeb said the amount is “more than $9 billion worth of almost two months’ worth of imports” and said it is “important to record not only the quantity of FX reserves but also the quality of FX reserves. These reserves are not built on the back of debt stocks,” he said.
SBP is expected to cut rates by 100 bps
The SBP is expected to cut its key interest rate by 100 basis points (bps) next week after keeping the key policy rate at a record high of 22 percent for seven straight meetings.
The central bank will meet on Monday, a week after Pakistan posted its lowest consumer price index (CPI) in May at 11.8 percent in 30 months, below most forecasts.
The decision will be taken a few days before Pakistan’s annual budget. The median of a Reuters poll of 16 analysts expected the SBP to cut rates by 100bps.
Ten analysts expect a cut of 100 bps, one analyst expects a cut of 150 bps, and four expect a cut of 200 bps. One of the respondents expected the bank to raise rates again.
Economic activity has slowed in Pakistan over the past two years as it has implemented tough reforms with the help of the International Monetary Fund (IMF) to stabilize its faltering economy.
GDP growth is expected to be 2 percent this fiscal year, which ends in June, and it was negative last year. The government has said it will target 3.5 percent this year as it hopes economic activity will pick up.
The government will formally apply to HPG for a new bailout this summer after ending short-term plans earlier this year. Lenders say they need to maintain tight monetary policy to control inflation, which has been above 20% since May 2022 and peaked at 38% last year.
Inflation has since slowed to 20pc in April and 11.8pc in May.
“Remembering the steady decline in inflation and the fact that SBP has shown prudence by not cutting rates prematurely, now there is room to cut risk-free and HPG,” said Uzair Ononus, an economic analyst.
However, Fawad Basir, head of research at KTrade, said the proposed tax reform in the budget could have a major impact on the economy, not just inflation. “Once the impact of such a decision is seen in the high-frequency data set, after successful negotiations with HPG, SBP will initiate an accommodative stance consistent with the US Fed’s strategy”.
