SBP raises policy rate to 12pc as oil price surge fuels inflation concerns

KARACHI: The State Bank of Pakistan (SBP) on Monday raised its policy rate by 50 basis points to 12 per cent, up from 11.5 per cent, citing rising energy prices amid the US-Iran war, persistent inflationary pressures and higher global oil prices.

The central bank had kept the policy rate unchanged at 11.5 per cent at its September 14 monetary policy meeting.

Speaking at a press conference after the Monetary Policy Committee (MPC) meeting, SBP Governor Jameel Ahmad said nine of the committee’s 10 members voted in favour of the increase, while one member opposed it.

Ahmad said the committee had assessed the impact of rising oil prices on inflation and reviewed key macroeconomic indicators, including the external account and remittances.

He said the current account position had improved, while the committee had also monitored foreign exchange inflows and remittance trends.

Pakistan received $10.9 billion in remittances during the first quarter of the current fiscal year, according to the governor, who expressed optimism about further improvement in inflows.

He said remittances were expected to reach $45 billion during the current fiscal year.

The governor also noted improvements in a scheme launched by the Pakistan Banks Association to facilitate remittances.

Pakistan’s inflation rate stood at 7.1 per cent, while rising international oil prices have added to concerns about the future inflation trajectory.

The SBP had previously expected inflation to approach the upper end of its target range by the first quarter of the next fiscal year. However, the persistence of elevated oil prices and their wider economic implications mean that the process is likely to take longer, he said.

Although core inflation improved during the first few months of the current fiscal year, the central bank remains concerned about the secondary effects of higher energy prices and their potential pass-through to other goods and services.

The MPC also considered consumer inflation expectations, forecasts by other forecasters and the implications of rising global commodity prices for the country’s external account.

Pakistan’s inflation rate stood at 7.1 per cent, while the central bank expects higher oil prices to influence the trajectory of inflation in the coming months.

Current account deficit seen at up to 1pc of GDP

Ahmad said the external account was likely to deteriorate somewhat compared with the assessment presented at the previous monetary policy meeting, mainly because of higher global commodity prices and a rising import bill.

However, the current account deficit is still expected to remain between zero and 1 per cent of gross domestic product (GDP), although the latest assessment has shifted towards the upper end of that range.

The governor said improved remittance inflows and a better export outlook would provide some support to the external account, partly offsetting the pressure from higher imports.

Pakistan received $10.9 billion in remittances during the first quarter of the current fiscal year, bringing inflows close to $11 billion, he said.

In view of the latest inflows and other developments, the SBP has revised its full-year remittance projection upwards to $45 billion from its earlier estimate of $44 billion.

Ahmad also pointed to a recently launched scheme by the Pakistan Banks Association, expressing expectations that it would help improve remittance inflows. The central bank has also reviewed trends in the number of Pakistani workers going abroad as part of its assessment.

Exports improve, but imports rise sharply

The governor said Pakistan’s export outlook had improved, although the pace of growth remained below what the economy needed.

Exports are now projected to reach between $32.5 billion and $33 billion during the current fiscal year, compared with $30.8 billion in the previous fiscal year.

The improvement in exports, alongside higher remittances, is expected to help contain pressure on the current account.

However, imports have risen more sharply than previously anticipated, limiting the benefit of stronger external inflows.

Pakistan’s imports stood at around $64.5 billion in the previous fiscal year. At the time of the previous monetary policy meeting, the central bank had estimated that imports would remain around $69 billion to $70 billion during the current fiscal year.

The latest assessment puts imports at approximately $71 billion, Ahmad said.

The increase in the import bill is expected to offset part of the improvement in exports and remittances, leaving the current account outlook weaker than previously anticipated, although the deficit is still projected to remain within the zero-to-1 per cent of GDP range.

Economic growth outlook

Turning to economic growth, Ahmad said Pakistan’s gross domestic product grew by 3.7 per cent in the fiscal year 2025-26, according to the revised estimate.

He said the overall growth figure had been affected by a downward revision in the final quarter of the previous fiscal year, when growth fell to 2 per cent from the earlier estimate of 2.9 per cent.

The slowdown was largely attributed to the situation in the Middle East, which affected economic activity towards the end of the fiscal year.

By contrast, growth averaged 4.2 per cent during the first three quarters of FY26, with economic momentum strengthening consistently from one quarter to the next, the governor said.

The SBP had earlier projected growth of between 3.75 per cent and 4.75 per cent for FY26. However, the weaker performance in the final quarter pulled the full-year growth rate down to 3.7 per cent.

Ahmad said the central bank had expected economic activity in the final quarter to improve further after the stronger performance in the preceding three quarters, but regional developments disrupted that momentum.

For the current fiscal year, the SBP has projected economic growth of between 3.5 per cent and 4.5 per cent.

Although official data for the first quarter of FY27 was not yet available at the time of the press conference, the governor said the central bank’s assessment suggested that growth momentum had started to recover.

He expressed confidence that the first-quarter growth figure, when released, would be higher than the 2 per cent recorded in the final quarter of the previous fiscal year.

The central bank will continue to assess developments in international oil prices, domestic inflation, external balances and economic activity as it evaluates the outlook for monetary policy.

SBP expects foreign exchange reserves to reach $25bn next year

Jameel Ahmad said the country’s foreign exchange reserves were in a considerably stronger position, with the central bank expecting them to rise to $23 billion by December and $25 billion by June next year.

He said Pakistan had moved beyond the difficulties it faced in managing its foreign exchange reserves, adding that maintaining the current momentum would remain a priority.

He said the reserves had increased by around $1 billion annually and were now more than 21.5 per cent higher, although the base of comparison was not specified in the briefing.

The governor said the central bank was managing the reserves more effectively and expected the improvement to continue over the coming months.

He also noted that international rating agencies were improving their assessments of Pakistan’s economic indicators.

Ahmad said the country’s external debt position had improved following repayments of loans obtained from partner countries and neighbouring states. He added that Pakistan expected its debt-servicing costs to decline.

On exports, the governor said several factors influenced export performance, including energy prices, production costs and other conditions affecting businesses.

He said banks were providing export refinancing loans at 4.5 per cent, aimed at supporting exporters and economic activity.

Ahmad also said the number of Pakistanis travelling abroad for employment had declined, with available statistics indicating a reduction in the trend of skilled workers leaving the country.

He said between 500,000 and 550,000 people had gone abroad annually over the past five years. The governor added that the central bank expected agricultural performance to improve during the current fiscal year, while overall economic growth was projected to range between 3.4 per cent and 4.5 per cent.

‘Pakistan’s external debt profile improves’

SBP Governor Ahmad said Pakistan’s external debt profile had improved significantly, with the share of short-term borrowing falling to around 20 per cent from 45 per cent in early 2023, while annual debt-servicing costs are expected to decline below $3.5 billion next year.

He said the shift towards long-term multilateral and bilateral financing had reduced refinancing pressures and improved the country’s ability to manage its external obligations.

He said around 80 per cent of Pakistan’s external debt now comprised multilateral and bilateral loans, compared with 55 per cent in early 2023. The remainder, including borrowing from other sources, had declined as a proportion of the total debt stock.

Multilateral loans from institutions such as the World Bank and Asian Development Bank generally have longer maturities, while bilateral financing benefits from arrangements with partner countries, including assurances that help facilitate the rollover of existing obligations, he explained.

Ahmad said the improvement in the debt profile was expected to gradually reduce Pakistan’s gross external financing requirements and ease pressure from repayments in the coming years.

The country’s annual external debt-servicing cost, which stood at around $4 billion in recent years and approximately $4.5 billion in 2023, is projected to fall below $3.5 billion next year, he added.

External debt remains around $107bn

Responding to concerns about Pakistan’s external debt, Ahmad said the outstanding stock stood at around $107 billion, with only a relatively modest increase over the past four years.

He said external debt had increased by approximately $5 billion to $6 billion during that period, compared with an average annual increase of around $6.5 billion between 2015 and 2022.

The governor said Pakistan had paid around $16 billion in interest on its existing external debt over the past four years, averaging approximately $4 billion annually.

Had the country borrowed no additional money during this period, the outstanding debt stock would still have risen to around $116 billion because of the interest burden, he argued.

Instead, Pakistan had limited additional borrowing while purchasing dollars from the market to meet interest payments and build foreign exchange reserves, he said.

Ahmad said the government had also been cautious about taking on expensive external loans, with the Finance Ministry recently rejecting some costly borrowing offers in favour of alternative financing arrangements.

He said the strategy was aimed at keeping borrowing costs manageable and extending repayment periods.

Longer maturities reduce refinancing risks

The governor said recent international bond issuances had helped extend the average maturity of Pakistan’s external debt from less than three years to more than four years.

He cited a recent issuance comprising $1.25 billion in bonds with a 10-year maturity and $1.75 billion in bonds with a maturity of five and a half years.

The longer repayment periods were expected to reduce the pressure of having to refinance large amounts of debt in a short period, he said.

Ahmad also pointed to improvements in Pakistan’s access to international financial markets, saying the response of international banks towards the country had improved.

He recalled that in 2022 and 2023, Pakistani importers often faced letters of credit requiring reconfirmation by international banks, with associated costs reaching 10 per cent to 12 per cent in some cases.

Those costs have since fallen sharply, to below 1 per cent in some cases, while many transactions no longer require reconfirmation, he said.

The improvement has reduced the cost of facilitating imports and helped Pakistani businesses access international banking services more easily.

Ahmad said the changes in the debt profile and external position had also contributed to improvements in Pakistan’s external credit assessments and borrowing conditions.

SBP defends remittances amid brain drain concerns

The governor also rejected the argument that rising remittances were primarily the result of an increase in the number of Pakistanis leaving the country, saying the trend should be assessed using published data.

He said the number of workers going abroad had declined over the past two years, while the number of highly skilled and highly qualified Pakistanis leaving the country had also fallen between 2023 and 2025.

Ahmad said 2015 recorded the highest annual outflow of workers in the preceding 15 years, at more than 900,000. In the past five years, annual departures had generally fluctuated between approximately 840,000 and 890,000, he added.

Despite the relatively stable or lower number of workers going abroad, remittances had nearly doubled over the past five years, rising from around $21 billion to $41.6 billion in the previous fiscal year.

The governor attributed the increase largely to reforms that encouraged overseas Pakistanis to send money through formal banking channels rather than informal networks.

These measures included narrowing the gap between exchange rates in the interbank and open markets, action against hundi and hawala networks, tighter monitoring of exchange companies and stronger enforcement against over-invoicing and under-invoicing.

The SBP had also introduced reforms in the exchange-company sector, including the closure or merger of companies that failed to meet regulatory requirements, stronger monitoring and improved information technology systems.

Ahmad said these measures had reduced incentives to use informal channels and helped direct a greater share of remittances through the formal financial system.

He stressed that remittances remained important for Pakistan’s balance of payments but should not be viewed as a substitute for export growth.

Export financing remains a priority

The governor said the government and the SBP remained focused on expanding exports alongside efforts to sustain remittance inflows.

He said export performance depended on several structural factors, including international competitiveness, productivity, manufacturing costs, energy prices, available exportable surpluses and demand in overseas markets.

The SBP had increased the allocation under its Export Finance Scheme from Rs1 trillion to Rs1.5 trillion, while banks were offering short-term export refinancing at 4.5 per cent, he said.

For longer-term export financing, Ahmad cited a government-backed scheme offering a fixed rate of 2 per cent for the first two years of a project and 5 per cent for the following eight years.

He said the concessional financing was intended to encourage exporters to expand production capacity, establish new projects and increase the volume of goods available for export.

The government had also introduced performance-based incentives under which exporters increasing their exports by up to 10 per cent over the previous year could qualify for a 1 per cent incentive, while those achieving growth above 10 per cent could receive a 2 per cent incentive, subject to the scheme’s conditions.

Ahmad said the incentives and financing facilities demonstrated that export promotion remained a priority, adding that Pakistan needed to address underlying production and competitiveness challenges to achieve sustained growth in exports.

He said stronger exports, together with remittances and a more sustainable external debt profile, would be important for maintaining stability in the country’s external account.