SBP stuns with 100bps rate cut as inflation cools, FX reserves set to rebound

The State Bank of Pakistan (SBP) surprised markets Monday with a significant 100 basis-point cut in its key interest rate, lowering it to 11%—a three-year low—despite expectations of no change or a smaller reduction.

Governor Jameel Ahmed, speaking at an analyst briefing following the monetary policy announcement, expressed optimism about the country’s economic outlook for the remainder of the fiscal year.

He noted that in the remaining two months of FY, Pakistan’s foreign debt obligation will be $1.3 billion to $1.5 billion, net of rollovers and refinancing. He added expected inflows from recent agreements are likely to materialize in May and June.

The central bank maintained its GDP growth forecast for FY25 at 2.5% to 3.5%, citing improved performance in the third quarter compared to the first half of the year. GDP growth in the first and second quarters stood at 1.3% and 1.7%, respectively.

Rupee Outlook Stable Amid Expected $4 billion Inflows

Foreign exchange reserves are expected to rise to $14 billion by June, bolstered by official inflows, according to projections from the State Bank of Pakistan (SBP). Total reserves could reach $19 billion (SBP Reserves of $14 billion + commercial banks’ reserves of $5 billion), including $4 billion from international commercial banks and a $1 billion tranche from the International Monetary Fund (IMF).

Despite financial pressures, the SBP’s Monetary Policy Committee remains optimistic, anticipating improvements in reserves by the end of fiscal year 2025 as planned inflows—especially those linked to the IMF program—materialize.

SBP governor commented that, current import numbers are in line with projections and are manageable.

Current Account Surplus After 14 Years

Pakistan posted a current account surplus of $1.9 billion for the July-March period of FY25, while SBP expects surplus to be around 0.5% of GDP compared to earlier forecast of -0.5% to +0.5% of GDP.

Improved Inflation Outlook

Headline inflation eased to 0.3% in April, marking a significant slowdown. The SBP expects average inflation for the fiscal year to remain below 5-7% target.

Debt Obligations remain at $1.3 billion in two months

Pakistan’s total external debt repayments for FY25 stand at $26 billion, with approximately $16 billion either rolled over or expected to be rescheduled. The country has already repaid $8.5 billion, leaving $1.3 billion in obligations for May and June.

Revenue Collection to miss FY25 targets

Federal Board of Revenue (FBR) tax collections rose 26.3% during July-April, yet still fell short of targets. The SBP stressed the need for structural reforms, particularly in broadening the tax base and improving compliance. Recent legislative measures to increase agricultural income taxation were welcomed, though their timely implementation remains crucial.

As per initial numbers, for FY26 government is likely to set tax collection target at PKR 14,300 billion, a growth of 16% year-on-year.

LSM Growth Stalls

Pakistan’s industrial sector showed mixed signs of recovery, with large-scale manufacturing (LSM) remaining weak due to contractions in construction-related industries. Gains in garments, textiles, pharmaceuticals, and automobiles have not offset downturns in other sectors.