SBP sees current account deficit in line with projections, inflation easing

By Our Correspondent
September 24, 2023

KARACHI: The central bank said on Saturday the current account deficit for the current fiscal year was in line with its projections, which would help ease inflationary pressures in the economy.

In the latest episode of the State Bank of Pakistan (SBP) podcast series, the Director of the Monetary Policy Department SBP, Amin Lodhi discussed the monetary policy decision taken on September 14, 2023. The episode offers insights into the factors leading to the decision, economic indicators considered by the Monetary Policy Committee (MPC), the future trajectory of inflation, and the economic outlook in light of the recent developments.

The MPC of the SBP decided to maintain the policy rate at 22 percent. The decision of the MPC was based on recent economic indicators. Most significantly, inflation, which peaked at 38 percent in May, and has gradually decreased to 27.4 percent in August due to tight monetary policy and fiscal contraction.

The SBP expects this downward trend to continue with the high policy rate leading to positive real interest rates on a forward-looking basis, along with lower demand. Improvements in agriculture output and a shift in money supply composition towards Net Foreign Assets (NFA) are also expected to contribute to curbing inflation.

The podcast addressed apprehensions about Pakistan’s current account deficit due to the recent increase in raw material imports and its potential impact on inflation.

Lodhi assured that the current account deficit is in line with SBP’s projections for FY24, minimising the risk of additional inflationary pressures.

The current account deficit in August was $160 million, which was a 79 percent decrease from the same month a year earlier. The current account deficit dropped by 54 percent to $935 million in the first two months of the current fiscal year.

The decrease in the deficit can be primarily attributed to a reduction in imports.

The SBP stated in its monetary policy in July that it expected the current account deficit to be kept within the range of 0.5 to 1.5 percent of GDP in FY24.

With the current account balance recording a surplus for the fourth consecutive month in June, the cumulative current account deficit in FY23 substantially narrowed to 0.7 percent of GDP from 4.7 percent in FY22.

Lodhi stressed that Pakistan’s economic recovery is expected to be moderate.

The growth rate of Net Domestic Assets (NDA) is expected to slow down due to fiscal contraction and increased external financing, thus improving the inflation outlook.

Regarding the recent increase in petroleum prices by the government, the podcast clarified that these factors were already considered in the MPC’s decision.

The episode delved into the importance of achieving a primary account surplus of at least 0.4 percent to meet the medium-term inflation target of 5 – 7 percent. Primary account, which excludes interest payments from government expenditures, reflects whether a government adopts contractionary or expansionary fiscal policies.

Prominently, government expenditure affects aggregate demand and, therefore, inflation. Achieving a fiscal surplus entails widening the tax net, reducing losses in public sector organisations, and providing targeted subsidies to manage aggregate demand and control inflation.