In a recent communication to the International Monetary Fund (IMF), the government has underscored its preparedness to address potential near-term challenges, signalling a commitment to maintaining economic stability.
The disclosure comes as part of the IMF’s first review under the stand-by arrangement.
The government, as revealed in the report, stands ready to respond decisively should near-term price pressures reemerge. This includes addressing stronger-than-expected second-round effects on core inflation and potential pressures on the exchange rate amid the normalisation of the current account.
Amid signs of weaker demand, positive supply developments, and decreasing pressures on the exchange rate, the government anticipates a notable decline in inflation in the coming months.
As a result, the policy rate was maintained at 22 per cent during the latest Monetary Policy Committee (MPC) meeting held on October 30. However, the government reiterated its readiness to respond promptly if there is a resurgence of near-term price pressures.
The primary objective is to ensure a clear downward trajectory for inflation and inflation expectations. The pace of future adjustments will be contingent on various factors, including inflation data, exchange rate developments, external position strength, and the fiscal-monetary policy mix.
The government aims to keep the real policy rate in positive territory on a forward-looking basis, signalling a commitment to bringing inflation within the target band by fiscal year 2026.
To enhance monetary policy transmission, the interest rate on major refinancing schemes, specifically the EFS and LTFF, will continue to be linked to the policy rate, with a spread of no more than 3 per centage points, as per the announcement by Pakistani authorities.
The report emphasised the importance of vigilance, highlighting that despite the return of the forward-looking real policy rate to positive territory, caution is necessary due to near-term risks.
With inflation expectations not yet firmly anchored, the Monetary Policy Committee is urged to respond robustly and promptly should inflationary pressures resurface.
Maintaining a positive real policy rate during a period of easing inflation and promptly addressing signs of new demand pressures or rising inflation expectations is seen as crucial.
This strategy aims to re-anchor inflation expectations and guide down core inflation from the second half of fiscal year 2024 onwards, contingent on the absence of a resumption in administrative import compression.
The report projects a significant decline in headline inflation through fiscal years 2025–26, aligning within the targeted 5–7 per cent range by fiscal year 2026. This outlook is supported by fiscal consolidation efforts and the normalization of global commodity prices.
While the IMF staff views the current stance as broadly appropriate given weak domestic demand, the report suggests that the MPC should remain prepared to respond resolutely if near-term price pressures reemerge, including second-round effects.
