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Tuesday June 25, 2024

SBP cuts interest rate for first time in four years: NEC approves 13th five-year uplift plan

PM Shehbaz chairs NEC meeting ahead of federal budget 2024-25

By Erum Zaidi & Mehtab Haider & Muhammad Anis
June 11, 2024
Prime Minister Shehbaz Sharif chairs the NEC meeting on June 10, 2024. — APP
Prime Minister Shehbaz Sharif chairs the NEC meeting on June 10, 2024. — APP

ISLAMABAD/KARACHI: The National Economic Council (NEC) Monday approved the 13th Five-year Development Plan.

Chaired by Prime Minister Shehbaz Sharif, the Council was informed that the targets of the plan included the development of every region, especially the backward areas, promotion of exports and small and medium enterprises, social protection and alleviation of poverty, capacity building of human resource, development of knowledge economy and a strategy to cope with the climate change impacts.

The Council directed the Ministry of Planning to present a comprehensive action plan to the provinces for their positive contribution to the economy and promotion of exports across various sectors.

Deputy Prime Minister and Foreign Minister Ishaq Dar, Defence Minister Khawaja Asif, Ahsan Iqbal, Ahad Khan Cheema, Muhammad Aurangzeb, chief ministers of four provinces and Gilgit-Baltistan and provincial ministers also attended the meeting.

It was decided that the provinces will be involved in the consultation process to achieve the economic growth rate and a beginning in this regard should be made from important sectors such as the agriculture, a statement issued by the PM media wing said. The meeting was informed that the production of export goods, innovation in agriculture, artificial intelligence and information technology sector aligned with the world standards.

The meeting was further informed that sustainable and renewable energy, effective utilization of water resources, uplift of youth and women and early implementation of the second phase of CPEC will ensure economic development in the next five years. The Council approved the economic growth targets, the macroeconomic framework and publication of the Annual plan for 2024-25.

It was also briefed about the national goals for the recovery of economy and development of the country and the measures to achieve them.

The Council was told that CPEC, international investment projects and other ongoing projects nearing completion will be given priority in the upcoming development budget.

Speaking on the occasion, Prime Minister Shehbaz Sharif said the government will ensure best utilisation of available resources for economic revival, welfare of masses and development of the country.

He said the federation would ensure consultations with the provinces and other stakeholders in all key matters and a consensus would be developed for economic revival in the country.

He said National Economic Council was the biggest forum to take decisions on national economy and economic revival.

Shehbaz directed the National Economic Council to constitute a committee to equip it with the modern era requirements.

The Committee in consultation with all the provinces and stakeholders will prepare its recommendations to make the Council more functional. The prime minister said agriculture was the backbone of the country’s economy and directed incorporation of proposals of the provinces about agriculture and other sectors in the development plan.

The Council was informed about the annual development plan and performance of the government departments in the outgoing fiscal year, and about the proposed development plan for the next financial year.

The meeting was told that the growth rate target for the next year had been increased.

Earlier at the outset, the National Economic Council offered fateha for the martyrs of Lakki Marwat terrorist attack.

Mehtab Haider adds: With the restoration of discretionary funding for parliamentarians under the Sustainable Development Goals Achievement Program (SAP) of Rs75 billion and inclusion of provincial nature projects, the National Economic Council (NEC) Monday approved jacking up the federal development outlay of Rs1500 billion for next budget.

For the SAP programme, the government had allocated Rs90 billion for the outgoing fiscal year out of which Rs61 billion could be utilised in the current fiscal year.

Initially, the government claimed that it was going to abolish SAP funding for the next budget and till Annual Plan Coordination Committee (APCC) three was no mention of SDGs Achievement Program. However, in the NEC summary funding was proposed to the tune of Rs50 billion which was jacked up to Rs75 billion just before the NEC meeting held under the Chairmanship of Prime Minister Shehbaz Sharif.

The NEC approved the insertion of over 239 new schemes into the PSDP list for the next budget.

The NEC was told that the IMF under the Public Investment Management Assessment (PIMA) and Climate-Public Investment Management Assessment (C-PIMA) Assessment Reports 2023 highlighted that several investments by various organizations were being done from own resources but were not being properly reflected.

The Finance Division and Ministry of Planning, Development and Special Initiatives sought details of such investments and the ministries/divisions were requested to provide details of development interventions being financed (other than PSDP) out of own resources by SOEs/subordinate/ attached departments/entities.

Earlier, the Annual Plan Coordination Committee (APCC) recommended to the National Economic Council (NEC) to approve Rs1221 billion for the federal PSDP of the next budget.

Total national development outlay of Rs3792 billion has been approved by the NEC with the federal Public Sector Development Program (PSDP) jacking up from Rs1221 billion to Rs1500 billion and provincial Annual Development Plans (ADPs) of Rs2095 billion and state owned enterprises (SOEs) investments of Rs196 billion for the upcoming budget.

After a heated debate, the NEC granted its assent on envisaging real GDP growth rate of 3.6 percent and keeping CPI based inflation at 12 percent for the next budget.

The PTI-led provincial government raised objection to envisaging low growth for agriculture sector in the next budget when the Center was claiming turning the economy into a positive trajectory.

The Ministry of Planning responded that in the wake of higher base of agriculture growth in the outgoing fiscal year, it would be hard to achieve higher growth in the coming fiscal year keeping in view higher base effect. However, Deputy Prime Minister Ishaq Dar intervened and asked the NEC to grant approval to the macroeconomic framework and then they would discuss it in detail.

For the PSDP, the federal government allocated Rs1400 billion from its budgetary resources out of which Rs825.5 billion was earmarked for ministries/division, Rs356.2 billion for corporations such as NHA, Wapda and Power, Rs53.1 billion for provincial nature projects, Rs74.5 billion for special areas AJK, GB, Rs63.7 billion for Merged Districts of KP and Rs100 billion for Public Private Partnership (PPP). The provincial ADPs envisages Rs2095 billion and SOEs investment of Rs196.9 billion.

Out of total provincial ADPs, Punjab allocated Rs700 billion development outlay, Sindh Rs764 billion, KP Rs351 billion, and Balochistan Rs281 billion for the next budget. The federal government will unveil the Economic Survey of Pakistan 2023-24, which is a pre-budget document containing the details of major socio-economic achievements during the outgoing fiscal year at 5pm today (Tuesday).

Finance Minister Muhammad Aurangzeb will present the pre-budget document in the National Assembly, according to a statement issued by the finance ministry. In a widely expected move, the State Bank of Pakistan (SBP) Monday cut the benchmark interest rate, marking its first rate reduction in four years amid a significant decline in inflation.

The SBP decreased the policy rate by 150 basis points to 20.5 percent. This reduction comes after keeping the rates at the historically high 22 percent since June last year in an effort to control inflation.

The rate cut exceeded the market expectations derived from multiple surveys predicting a decrease of at least one percentage point.

The decision came two days before the country is set to table its annual budget, which is expected to include ambitious fiscal targets designed to bolster its case for a fresh bailout deal with the IMF.

There are several factors supporting the case for a rate cut. The price pressures are decreasing, there is a significant positive real interest rate, recent current account surpluses have eased currency pressures, commodity prices are softening, and globally the rate cut cycle has begun, with the Bank of Canada and the ECB lowering interest rates.

The Monetary Policy Committee (MPC) of the central bank noted that May’s inflation numbers were better than expected.

Tight monetary policy and fiscal consolidation have also contributed to a drop in underlying inflation pressures. Headline inflation dropped to 11.8 percent in May from 17.3 percent in previous month due to the declining food prices and reduction in the administered energy prices. Core inflation also fell to 14.2 percent from 15.6 percent.

“The committee, on balance, viewed that it was now an appropriate time to reduce the policy rate,” the SBP said in a statement.

“The committee noted that the real interest rate still remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5 – 7 percent,” it said.

“The committee also emphasised that the future monetary policy decisions will remain data-driven and responsive to evolving developments related to the inflation outlook,” it added.

The MPC notes that there are still some upside risks to the near-term inflation forecast, citing the possibility of a sharp increase in inflation in July as a result of impending budgetary measures and uncertainty around potential future adjustments to energy prices. However, it pointed out that the earlier monetary tightening’s cumulative effect is anticipated to contain inflationary pressures. The SBP projects that, for the fiscal year 2024, inflation would hover around 23–25 percent.

The monetary easing will help stimulate demand and support the economic recovery. Pakistan intends to increase its growth rate from the current year’s 2.4 percent to 3.6 percent in the upcoming fiscal year. Besides, the reductions in interest rates would also result in lowering the debt servicing costs. Analysts anticipate a decline in interest rates of 600-700 bps by June 2025.

“As the MPC points out upward inflationary risks emanate from the FY25 budget and future increases in energy tariffs, so the ball is in the government’s court to manage inflation. If the higher tax revenue targets are rate-driven, as the MPC notes, the formal tax-paying sector has more to worry about than the policy rate,” the Pakistan Business Council said on social media platform X (previously Twitter).

“Businesses should derive comfort from the narrowing current account deficit, a primary surplus on the fiscal account, deceleration in the growth of currency in circulation, declining food inflation, and stable FX reserves after meeting maturing debt repayments,’ it said. “All these factors augur well for further reduction in the policy rate,” it added.