SBP Cuts Rates Amid Improved Economic Indicators, Outlines Debt Management Strategy

Karachi: The State Bank of Pakistan (SBP) has reduced its policy rate by 250 basis points to 15.0%, a decision influenced by a faster-than-expected decline in inflation, now nearing the central bank’s medium-term target. This rate cut was part of broader discussions in the SBP’s post-monetary policy statement analyst briefing, where the Governor highlighted key fiscal achievements and future financial strategies.

According to AKD Securities Limited, the Governor detailed how the country’s tight monetary policies have been crucial in sustaining the downward inflation trend. The briefing also covered Pakistan’s debt obligations, noting the government has to manage US$26.1 billion in FY25, with a significant portion consisting of rollovers and the rest allocated to debt and interest repayments. As of now, the government has successfully cleared US$5.5 billion of this debt.

Notably, external debt has remained stable over the past two years, with public external debt decreasing to US$98 billion from US$100 billion, reflecting effective management and reduced dependence on less favorable debt sources like commercial loans and Eurobonds. The briefing further revealed that bilateral and multilateral partners have reassured their financial support for Pakistan during the ongoing 37-month IMF program.

The total gross financing requirements for the country have also significantly decreased to 4.7% of GDP from 9.0% in FY22. The SBP projected the current account to remain at the lower end of the 0-1% of GDP range, with remittances expected to continue their upward trend, likely surpassing US$3.0 billion in October 2024. These positive developments, coupled with the receipt of the first tranche from the IMF, have helped boost foreign exchange reserves to US$11.2 billion, with expectations of further increases.

Looking ahead, the SBP is optimistic about reducing domestic debt exposure to T-Bills to under 20% by the end of FY25 due to a strategic shift in maturity profiles. The central bank also anticipates a reduction in the interest expense on both domestic and foreign loans, projecting a total of PkR8.5 trillion for FY25, down from the initially budgeted PkR9.8 trillion.

Furthermore, export financing is set to transition to the EXIM bank under a five-year plan, with significant government-backed financial support aimed at bolstering Pakistan’s exporters.

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