Chapter-03

3 Monetary Policy and Inflation
3.1 Policy Review Inflation Projections Figure 3.1

and Actual Inflation - FY23
SBP continued to tighten monetary policy stance SBP projection range
Actual inflation - 12 mma
amid rising inflation expectations, multi-decade
percent
high inflation outcomes and sustained pressures 30
on the external account. During FY23, the SBP’s
25
Monetary Policy Committee (MPC) increased
the policy rate by a cumulative 825 basis points 20
(bps) to 22 percent. The interaction of sequential
15
domestic and global supply shocks with
longstanding structural issues, which amplified 10
Sep-22
Dec-22
Jun-23
Mar-23
Jan-23
Apr-23
Aug-22
Nov-22
May-23
Jul-22
Oct-22
Feb-23
input costs and raised inflation expectations, led
to intense and persistent inflationary pressures
during the year. Thus, the average headline Sources: PBS, SBP projections and calculations, Planning
National CPI (NCPI) inflation soared to 29.2 Commission
percent in FY23, around the upper end of SBP’s
FY23 began with highly uncertain global
revised inflation projection range of 27 – 29
economic environment because of the fallout of
percent (Figure 3.1).
Russia-Ukraine conflict. In the case of Pakistan,
the confluence of global economic uncertainties
The surge in inflation was broad-based with
and domestic challenges further augmented
rising food prices having a dominant
inflationary pressures. A multitude of domestic
contribution, followed by Non-Food Non-
factors, including flood related domestic food
Energy (NFNE) and energy group. Inflation
shortages; hike in energy prices; domestic
maintained an uptrend almost throughout FY23,
supply constraints amid prioritization of
with around 90 percent of the items witnessing
imports; increase in taxation and other levies
double-digit increase in prices in both the rural
introduced through the Finance
and urban baskets (Figure 3.2).
(Supplementary) Act 2023; less than planned
Frequency Distribution of Changes in Prices of CPI Items Figure 3.2

<0 0--5 5--10 >10
percent Urban Rural
100 percent
100
80 80
60 60
40 40
20 20
0 0
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
Q3-FY23
Q4-FY23
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
Q3-FY23
Q4-FY23
Sources: Pakistan Bureau of Statistics, and State Bank of Pakistan calculations

Monetary Policy & Inflation
State Bank of Pakistan Annual Report 2022-2023State Bank of Pakistan Annual Report 2021-22
fiscal consolidation; and rising domestic further stoked inflationary pressures (Figure
uncertainty, contributed to a sustained uptrend 3.3).
in inflation during the year. In addition,
uncertain global economic and financial These macroeconomic challenges presented
conditions; elevated global commodity prices; significant risks to price and financial stability
stringent external financing conditions; and and medium-term economic growth prospects.
delay in completion of the 9th review under the While monetary tightening signified slowdown
IMF’s EFF program, kept external accounts in domestic demand and thus economic activity
under stress, leading to PKR depreciation, which in the short-term, these concerns were
outweighed by risk of inflation expectations
Supply Shocks, FY23 Figure 3.3
Months July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
PKR
Change -27.3 -25.7 -27.1 -22.2 -22.2 -21.2 -24.7 -34.2 -35.9 -35.3 -31.5 -28.7
(yoy; %)
Global
Commodity 39.2 48.3 28.2 -0.1 4.9 4.1 -5.0 -14.2 -29.8 -25.1 -30.1 22.3
Prices (yoy; %)
Electricity
Tariffs -
3.5 3.5 0.91
Annual
Rebasing
(Rs. per KWh)
Electricity
0.57 from
Tariffs - 1.49 1.49
Jun 1 &
Quarterly to to 0.5
1.55 from 0.51
Adjustments 3.21 3.21
Jul 1
(Rs. per KWh)
Natural Floods in July-September 2022 inundated about one-third of the country, and damaged
Disaster livestock and crops
PDL - Avg. of
Petrol/Diesel 7.5 15.0 24.9 31.3 38.3 41.9 45.0 47.5 50.0 50.0 50.0
22.5
(Rs. per liter)
Finance
Finance RD on (Supplementary) Act
Tax Related Act imports 2023;
Service
Measures 2022 raised GST raised from 17
Developm
percent to 18 percent
ent
MoC's ban on 500+ 100 percent CMR
import items in Jul-Aug extended in Dec
Import-related
restrictions SBP's prior approval list SBP issued
extended in July to include prioritization
machinery & electronics list in Dec
Effective Jan 01, 2023, government increased gas price for almost all sectors:
Gas Prices
for domestic use: from 33 to 112 percent (depending on the slab); for commercial use: ~29 percent
Inflation
(yoy; %) 24.9 27.3 23.2 26.6 23.8 24.5 27.6 31.5 35.4 36.4 38.0 29.4
Sources: SBP, PBS, IMF, NEPRA, MoC, FBR, OGRA
42
Monetary Policy and Inflation
becoming entrenched. In a bid to anchor account outlooks appeared to have contained on

inflation expectations and provide support to account of several factors. First, as seen from the
PKR, the SBP continued to tighten its monetary high frequency indicators, the lagged impact of
policy stance during FY23 in all its reviews with monetary tightening and a range of demand
the exception of three occasions, when the MPC compression measures introduced since last year
decided to keep the policy rate unchanged in had successfully curtailed the pace of economic
August, and October 2022 and on 12th June 2023. activity. Second, with rising risks to global
economic growth prospects, global commodity
Around the time the MPC met in July 2022, prices were also on a downtrend. Third, the
macroeconomic outlook had worsened successful completion of combined 7th and 8th
noticeably. Particularly, unwinding of energy reviews under the IMF’s EFF program in August
subsidies, and continued growth momentum of 2022 improved external account outlook. Lastly,
domestic demand in conjunction with surge in a significant supply shock in the form of floods
global commodity prices, pushed the year on was expected to further weaken demand-side
year (YoY) inflation substantially to 21.3 percent pressures on inflation and current account
in June 2022 from 13.8 percent a month earlier. balance.
The upsurge in demand, in addition to lingering
domestic uncertainty and strengthening of the In view of these developments and a cumulative
US$, further accentuated pressures on PKR. In monetary tightening by 800 bps since September
view of deteriorating inflationary situation and 2021, the MPC decided to keep the policy rate
external account outlook, the MPC raised the unchanged in its meetings convened in August
policy rate by 125 bps in July 2022. Besides, to and October 2022, while indicating its intentions
strengthen the monetary policy transmission, to remain data-dependent.
the MPC also linked the interest rates on EFS
and LTFF loans with the policy rate. As the year progressed, the changing domestic
and global economic landscape and successive
Considering the latest developments, the MPC supply shocks significantly altered the
anticipated strong second round effects macroeconomic outlook. Particularly, the
emanating from increase in energy prices after monsoon floods that hit the country during Jul-
removal of power subsidies, and projected the Aug 2022 gave rise to food shortages, which
average headline NCPI inflation to remain amplified existing price pressures. In addition,
elevated in the range of 18 – 20 percent during after the reversal of a temporary administrative
FY23. Accounting for the impact of fiscal cut in electricity prices, energy inflation rose
consolidation envisaged in the budget and the sharply in October 2022, whereas inflation
lagged impact of monetary tightening since expectations edged up due to increased
September 2021, real GDP growth was projected uncertainty about the path of food and energy
in the range of 3 - 4 percent in FY23. The prices. The combined impact of these factors
committee also projected the CAD to fall to 3 along with the second round effects of strong
percent of GDP in FY23, based on the food and energy prices to broader prices and
assumptions of falling imports, moderating wages, spurred inflation momentum
domestic demand and the continued resilience considerably in October 2022.
in remittances and exports. This assessment was
subject to substantial uncertainty arising from These developments raised concerns about
the path of global commodity prices, domestic persistent and pervasive inflationary pressures
fiscal policy stance and exchange rate and entrenchment of inflation expectations,
movement. which prompted MPC to resume monetary
tightening by raising the policy rate by 100 bps
By the time, the committee met in August and in its meeting in November 2022, despite visible
October 2022, the risks to inflation and external slowdown in economic activity and reduction in
43
CAD. Moreover, after incorporating the impact performance, the government announced
of floods, the MPC revised its assessment of increase in taxes and levies through the Finance
macroeconomic outlook in November 2022. (Supplementary) Act 2023 in February 2023, and
Specifically, the Committee raised the inflation also introduced upward adjustments in POL
projection range for FY23 to 21 - 23 percent, and gas prices during February 2023. These
whereas the real GDP growth projection was measures caused upward drift in inflation
trimmed to around 2 percent. expectations, besides resulting in an upsurge in
inflation from March 2023 onwards.
Notwithstanding the impact of monetary
contraction and weakening domestic demand, These developments led the MPC to further
the headline inflation remained on an upward revise the inflation projection range upward to
trajectory as flood driven damages to agriculture 27 – 29 percent for FY23 in March 2023. Keeping
produce and livestock exacerbated shortages of in view the deterioration in the near-term
various consumer food items causing upward inflation outlook, the MPC raised the policy rate
pressure on food prices. In addition, fiscal by a cumulative 600 bps during the second half
slippages and external account vulnerabilities of FY23. While assessing the implications of
owing to meagre financial inflows net of monetary tightening, the MPC noted that,
scheduled debt repayments, stemming from barring any unexpected shocks, the real interest
tightened global financial conditions and rates had entered a positive territory on a
domestic uncertainties also weighed on inflation forward-looking basis, which was expected to
outcomes through weakening of PKR. anchor inflation expectations and bring inflation
down towards the medium-term target of 5 – 7
To address the rising external account percent by end FY25.
vulnerabilities, SBP and the government
introduced temporary restrictions on imports In addition to policy tightening, MPC also
during the year, which though alleviated emphasized the need of various structural
pressures on external accounts, amplified reforms, to achieve the objective of price stability
domestic shortages of various non-essential during the year. These included: (i) introduction
items, adding to price pressures. On the other of non-traditional measures to curtail energy
hand, to address concerns about fiscal demand for containing trade deficit to
sustainable levels and reducing pressures on
Lending Rates and Private Sector Credit- Figure 3.4 external accounts; (ii) introducing administrative
FY23 measures and ensuring timely imports to ease
Average overnight rate
Policy rate (end-period) food inflation; (iii) aligning domestic energy
Weighted average lending rate prices with global prices and provision of
Private sector credit - rhs
percent yoy growth in percent 25
targeted support to the vulnerable segment of
25 society; and (iv) achieving targeted fiscal
20
consolidation to complement monetary
20 15
tightening to help bring inflation down.
10
15 5
The rise in policy rate was transmitted to
0
weighted average lending rates, which
10 -5
combined with the impact of floods and supply
Aug-22
Oct-22
Nov-22
Feb-23
Jul-22
Jun-23
Sep-22
Dec-22
Mar-23
Apr-23
Jan-23
May-23
chain disruptions, weakened economic activity

during FY23, leading to a decline in private
Source: State Bank of Pakistan sector credit (Figure 3.4).
44
3.2 Global Inflation and to bring inflation within the targets. The
contractionary policies, along with the
Monetary Policy Responses slowdown in Chinese economy in 2022 amid
Covid resurgence and downbeat real estate
After peaking out around the mid of 2022, market, heightened the risk of a global economic
headline inflation started to moderate in recession, which further kept global demand in
emerging and developing economies (EMDEs) check.2, 3
as well as in advanced economies (AEs) (Figure
3.5a); whereas, core inflation remained The knock-on impact of these developments in
persistent (Figure 3.5b).1 The declining trend in terms of a contraction in global demand for
headline inflation was precipitated by receding energy products (crude oil and natural gas) was
global commodity prices, particularly of energy quite pronounced.4 On the supply side,
and food, since mid-2022 due to softening global rerouting of Russian oil via non-sanctioned
demand alongside some improvement in supply countries, primarily China and India, contained
prospects (Figure 3.6). oil prices, after AEs implemented price cap and
ban on oil imports from Russia in December
Global economic activity, as measured by Sentix 2022.5 Moreover, OECD countries decided to
Economic Indicator, remained downbeat in release strategic reserves, which helped offset, in
2022, with only a slight uptick in 2023 (Figure part, the OPEC+ production cuts introduced
3.7). The global monetary tightening, which had earlier.
kicked off in late 2021 and early 2022 to tame
post-Covid and post-Ukrainian conflict The prices of natural gas, after peaking in
inflationary pressures, helped to slow the pace August 2022, also came down from Q2-FY23
of global demand. The tightening cycle onwards, as fears of shortages in the wake of the
continued into FY23, as central banks struggled Russia-Ukraine conflict had prompted European
Headline Inflation Figure 3.5a Core Inflation Figure 3.5b

EMDEs FY17-FY19 Average EMDEs FY17-FY19 Average
Advanced economies FY17-FY19 Average Advanced economies FY17-FY19 Average
percent percent
12 7
10 6
8 5
4
6
3
4
2
2
1
0 0
Sep-20
Sep-21
Sep-22
Mar-21
Mar-22
Mar-23
Jan-21
Jan-22
Jan-23
Nov-20
May-21
Nov-21
May-22
Nov-22
May-23
Jul-20
Jul-21
Jul-22
Sep-20
Sep-21
Sep-22
Mar-21
Mar-22
Mar-23
Jan-21
Jan-22
Jan-23
Nov-20
May-21
Nov-21
May-22
Nov-22
May-23
Jul-20
Jul-21
Jul-22
Source: Haver Analytics
1 AEs refer to Canada, France, Germany, Italy, Japan, the United Kingdom and the United States; whereas EMDEs refer to a group
of 83 countries.
2 Growth in world’s real GDP declined from 5.8 percent in 2021 to 3.3 percent in 2022. It is expected to decline to 3.0 percent in 2023.
Source: OECD, Haver Analytics

3 China’s oil and gas consumption in 2022 declined for the first time since 2000 on year on year basis. Source: IMF, World Economic
Outlook April 2023

4 Source: International Monetary Fund (2023). World Economic Outlook. Washington D.C.: IMF
5 The EU and the UK banned the seaborne crude oil imports from Russia on December 5, 2022. (Source:
www.energyandcleanair.org/eu-ban-on-russian-oil-why-it-matters-and-whats-next/)
45
Global Commodity Price Indices Figure 3.6
a) All commodities b) Crude oil c) Natural gas

300 300
Russia-Ukraine 1000
250 Conflict begins late 250
Feb 2022 800
200 200
600
150 150
400
100 100
200
50 50
0 0 0
Jul-19
Jul-20
Jul-21
Jul-22
Nov-19
Mar-20
Nov-20
Mar-21
Nov-21
Mar-22
Nov-22
Mar-23
Nov-19
Nov-20
Nov-21
Nov-22
Mar-20
Mar-21
Mar-22
Mar-23
Jul-19
Jul-20
Jul-21
Jul-22
Jul-19
Jul-20
Jul-21
Jul-22
Nov-19
Mar-20
Nov-20
Mar-21
Nov-21
Mar-22
Nov-22
Mar-23
d) Food e) Base metals f) Agriculture raw materials
180 300 160

160
250
140 120
120 200
100
150 80
80
60 100
40 40
20 50
0 0
0
Nov-19
Nov-20
Nov-21
Nov-22
Mar-20
Mar-21
Mar-22
Mar-23
Jul-19
Jul-20
Jul-21
Jul-22
Nov-19
Nov-20
Nov-21
Nov-22
Jul-19
Jul-20
Jul-21
Jul-22
Mar-20
Mar-21
Mar-22
Mar-23
Mar-20
Mar-21
Mar-22
Mar-23
Jul-19
Jul-20
Jul-21
Jul-22
Nov-19
Nov-20
Nov-21
Nov-22
* The dotted lines represent FY17-FY19 average

Source: IMF primary commodities data
countries to adequately fill their storage facilities Sentix Economic Indicator (Current Figure 3.7
with LNG imports (partly replacing natural gas). Economic Situation)
World World average*
Additionally, warmer-than-expected winter in
Asia excl. Japan Eastern Europe
Europe helped keep demand pressures on gas Latin America
prices in check. Besides, food prices also 40
percent
retreated in FY23, mainly due to improvement
in supply of key food items with the Black Sea
0
Grain Initiative signed in July 2022.
Nevertheless, food prices remained volatile in
-40
the second half of FY23, with some restrictions
still in place, like India’s ban on wheat and rice
-80
exports, and uncertainty surrounding the
Oct-19
Oct-20
Oct-21
Oct-22
Apr-20
Apr-21
Apr-22
Apr-23
Jan-20
Jan-21
Jan-22
Jan-23
Jul-19
Jul-20
Jul-21
Jul-22
Russia-Ukraine conflict.
*FY17-FY19
While headline inflation declined, core inflation Source: Sentix Index, Haver Analytics
turned out to be stickier (Figure 3.5b). In the
46
Policy Rate Trends in AEs Figure 3.8a Policy Rate Trends in EMDEs Figure 3.8b
Increased Unchanged Increased Unchanged Decreased
no. of countries/regions*
12 80 no. of countries
9 60
6 40
3 20
0 0
Jun-22
Sep-22
Dec-22
Jun-23
Jan-22
Apr-22
Jan-23
Apr-23
May-22
Aug-22
Nov-22
May-23
Feb-22
Mar-22
Feb-23
Mar-23
Jul-22
Oct-22
Feb-22
Jun-22
Oct-22
Nov-22
Feb-23
Jul-22
Jun-23
Mar-22
Aug-22
Jan-22
Apr-22
Sep-22
Dec-22
Mar-23
Jan-23
Apr-23
May-22
May-23
Note: 11 countries + 1 region (Euro Area)
Sources: Haver Analytics, Bank of International Settlements, Note: 80 countries
Central Banks' websites; SBP calculations
case of advanced economies, core inflation necessitated a large increase in the policy rate
almost plateaued, whereas in emerging and during H2-FY23.
developing economies, it showed some signs of
receding only in the last quarter of FY23. This 3.3 Pakistan’s Monetary
was despite year-on-year decline in prices of
base metals and agriculture raw materials.6
Aggregates
Second round effects of the earlier increases in The broad money (M2) grew by 14.2 percent in
the energy prices, tight labor markets and FY23, slightly higher than 13.6 percent in the
services inflation, which responds to interest previous year. The growth in M2 was entirely
rate changes with relatively longer lag, explain due to Net Domestic Assets (NDA) of the
higher core inflation. banking system, which expanded by Rs 5,860.5
billion in FY23 compared to Rs 4,782.9 billion in
The persistence of underlying inflationary FY22. The Net Foreign Assets (NFA) of the
pressures led many central banks to adopt banking system, reflecting increased stress on
aggressive monetary policy stance across AEs external accounts, contracted by Rs 1,932.8
and EMDEs (Figure 3.8a & 3.8b). The pace of billion in FY23 (Table 3.1).
monetary tightening, which was rapid in 2022,
somewhat reduced in 2023 (January through On the asset side, a considerable increase in
June). Nevertheless, with inflation still government budgetary borrowing from the
exceeding the pre-Covid levels, as well as the banking system underpinned the expansion in
inflation targets, many central banks maintained NDA during FY23. The increase in net
tight monetary stance, and some central banks budgetary borrowing was largely due to
in advanced economies further increased the unavailability of external financing.
policy rates during the second half of FY23. Furthermore, borrowings by the Public Sector
However, some emerging economies started to Enterprises (PSEs) also increased, as energy
reduce policy rates in H2-FY23 in view of lower sector relied heavily on the domestic banking
inflation outturns. This was in contrast to system mainly to settle circular debt related
Pakistan’s experience, where deteriorating payments. Likewise, the financing under
inflation and external account outlooks commodity operations was higher than last year,
as increase in wheat support price enhanced
6Base metals include: Aluminum, Cobalt, Copper, Iron Ore, Lead, Molybdenum, Nickel, Tin, Uranium, Zinc;
Agriculture raw materials include: Cotton, Wool, Timber, Rubber, and Hides
47
Monetary AggregatesP Table 3.1

flows in billion Rupees; growth in percent
Change in Stock Growth Contribution to M2 Growth
FY22 FY23 FY22 FY23 FY22 FY23
M2 (A+B) 3,304.9 3,927.7 13.6 14.2 13.6 14.2
A. NFA -1,478.0 -1,932.8 -203.9 -256.6 -6.1 -7.0
B. NDA 4,782.9 5,860.5 20.3 20.7 19.7 21.2
Budgetary borrowing 3,133.0 3,744.7 20.4 20.2 12.9 13.6
SBP -191.1 105.4 -3.6 2.1 -0.8 0.4
Scheduled banks 3,324.1 3,639.3 33.1 27.2 13.7 13.2
Commodity operations 229.7 352.3 25.4 31.1 0.9 1.3
Private sector credit 1,612.1 -72.9 21.1 -0.8 6.6 -0.3
PSEs -43.3 293.7 -3.1 21.5 -0.2 1.1
Other items net -156.3 1,116.0 8.7 -56.9 -0.6 4.0
Reserve money 663.1 2,100.8 7.7 22.5 - -
Currency in circulation 662.5 1,576.3 9.6 20.8 2.7 5.7
Deposits 2,615.1 2,327.6 15.1 11.7 10.8 8.4
P: provisional
Source: State Bank of Pakistan
borrowing needs of the procurement agencies. slightly alleviated pressures on the SBP’s FX
Meanwhile, credit to the private sector remained reserves; hence NFA posted a marginal increase
lackluster during FY23 due to the deteriorating after witnessing a consistent downtrend since
economic conditions and rising cost of Q1-FY22 (Figure 3.9). On the liability side, the
borrowing amid high interest rates. growth in currency in circulation accelerated to
20.8 percent in FY23 from 9.6 percent in the
With regards to NFA, reduced financial inflows previous year, while growth in deposits
due to uncertainty surrounding the resumption decelerated from 15.1 percent in FY22 to 11.7
of IMF program in particular and domestic percent in FY23 (Figure 3.10).
economic environment in general, affected the
NFA of the banking system. SBPs’ NFA More than half of the increase (55.7 percent) in
reflected most of this decline. However, currency in circulation was concentrated in Q4-
disbursement of some multilateral and FY23, which included the month of Ramazan
commercial loans in the last quarter of FY23 and two Eid festivals. While the withdrawal of
Quarterly Flows of NFA Figure 3.9 Quarterly Deposit Flows Figure 3.10
SBP Scheduled banks Total Government NFPSE NBFIs
Businesses Personal Others*
billion Rupees billion Rupees
800 2,400
400 1,800
0 1,200
-400 600
0
-800
-600
-1,200
Q1-FY20
Q2-FY20
Q3-FY20
Q4-FY20
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
Q3-FY23
Q4-FY23
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
Q3-FY23
Q4-FY23
* Others include: trusts and non-resident deposits

Source: State Bank of Pakistan Source: State Bank of Pakistan
48
deposits for Ramazan and Eid related spending tariff adjustments, and increase in circular debt
partly explains this increase, rising over the past many years.8 Consistently large
macroeconomic uncertainty and high inflation overdue payments in the energy sector
also contributed to the higher currency in amplified liquidity pressures during FY23.
circulation. Meanwhile, an overall slowdown in This is despite adjustments in power and gas
domestic economic activity and decline in tariffs during FY23, to contain the pace of
workers’ remittances was mainly responsible for accumulation in circular debt.
the deceleration in deposit mobilization during
FY23. Commodity Financing
Segment-wise bifurcation shows that the The overall financing under commodity
deposits of private businesses and Non- operations increased by Rs 352.3 billion in FY23,
Financial Public Sector Enterprises (NFPSEs) compared to an offtake of Rs 229.7 billion last
decelerated during the review period. The slight year (Table 3.2). Borrowing by wheat procuring
slowdown in the deposits of private businesses agencies dominated this expansion, largely due
reflects their inclination to use own funds in a to increase in Minimum Support Price (MSP) of
high interest rate environment. In the case of wheat in order to incentivize farmers.9 In line
NFPSEs, the slowdown is explained by the with the seasonal procurement operations for
reclassification of some of the NFPSEs as federal wheat, the entire borrowings were concentrated
government institutes from December 2022 in Q4-FY23.10 Meanwhile, sugar-procuring
onward. On the other hand, deposits of Non- agencies increased their borrowings in FY23, as
bank Financial Institutions (NBFIs) declined the government allowed sugar mills to export
during FY23, as the NBFIs partly shifted their 250,000 MT of sugar in January 2023 (Chapter 6).
deposits to the government securities aiming to
earn higher returns. Meanwhile, personal Commodity Financing Table 3.2
deposits grew by 15.9 percent in FY23, flows in billion Rupees
encouraged by favorable returns on deposits FY22 FY23

offered by banks amid higher interest rates. Total 229.7 352.3
Wheat 223.5 299.1
Credit to PSEs Sugar -0.2 39.9
Cotton 0.1 0.2
Credit to the PSEs registered an increase of Rs Rice 0.0 0.0
293.7 billion during FY23, compared to a net Source: State Bank of Pakistan
retirement of Rs 43.3 billion last year. Bulk of
the borrowings were made by a leading oil Government Borrowings
marketing and distribution company to meet
liquidity needs amid pending receivables from The government’s budgetary borrowings from
other energy-related enterprises. 7 These the banking system grew by 20.2 percent during
borrowings primarily reflected the fallout of FY23 over last year. Besides large fiscal deficit,
higher operational losses, particularly the unavailability of adequate external flows
perennial structural deficiencies in the energy increased government’s reliance on commercial
sector such as un-targeted subsidies, delayed banks to finance the deficit. Consequently, the
7 Source: Quarterly Financial Statement of Pakistan State Oil for the period ended March 31, 2023,
(www.dps.psx.com.pk/download/document/207213.pdf)
8 Power sector circular debt rose to Rs 2.5 trillion on end-March 2023, from Rs 2.3 trillion on end-June 2022. Source: International
Monetary Fund (2023). Country Report No. 23/260. Washington D.C.: IMF.
9 The provincial governments of Sindh and Punjab announced a sizeable increase in MSP of wheat from Rs 2,200 per 40kg to Rs
4,000 and Rs 3,900 per 40kg respectively for the crop year of 2023-24.
10 During Q4-FY23, net borrowings by the wheat procurement agencies was Rs 357.6 billion.
49
Government Borrowings from the Figure 3.11

Banking System
expectation of increase in interest rates, most of
SBP Scheduled banks Total the market offers were placed in 3-month T-bills,
billion Rupees where the offer-to-target ratio stood at 3.9
3,000
during FY23 (Figure 3.12). On the other hand,
2,000 the offers for 6-month and 12-month bills
remained lower than the targets. Following the
1,000
increase in the policy rate, the cut-off rates
0 remained on an upward trajectory during the
year in almost all auctions. Investors’ keen
-1,000
interest in 3-month paper urged the government
-2,000 to accept about 60 percent of the offered amount
in this instrument. Most of the issuances were
Q1-FY20
Q2-FY20
Q3-FY20
Q4-FY20
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
Q3-FY23
Q4-FY23
made during the fourth quarter when the
investors shied away from locking funds in
Source: State Bank of Pakistan PFLs.11
government borrowed Rs 3,639.3 billion from
For PFLs, the market behavior underwent a shift
commercial banks in FY23, compared to a
during the year. The quarterly trends show that
borrowing of Rs 3,324.1 billion last year (Figure
the market offers for PFLs exceeded three times
3.11).
of the target amount during H1-FY23, in a bid to
benefit from attractive returns by locking funds
Primary Auctions
in medium and long-term variable rate
instruments. However, in Q4-FY23, the market
Soaring inflation and external pressures that led
moved away from PFLs and shifted its interest
to almost successive hikes in the policy rate by a
towards T-bills and fixed rate PIBs. The offer-to-
cumulative 825 bps during FY23, kept upward
target ratio for PFLs fell to 1.0 times in Q4-FY23
pressure on cut-off rates in the auctions of
from an average of 3.0 times during the first
government securities throughout the year.
three quarters. The higher yields on fixed rate
Further, the market remained inclined towards
PIBs made it an attractive instrument as market
3-month T-bills and floating coupon PIBs (PFLs)
was expecting a status quo or decrease in policy
to minimize losses due to increase in interest
rate in the last quarter.
rates in the intervening periods. On its part, to
contain rollover risk while meeting its large In overall terms, the total acceptance of fixed
financing requirements, the government also rate PIBs slightly exceeded the maturing amount
allocated higher targets (on net of maturity during FY23, because of the market’s interest to
basis) for PFLs (Table 3.3). Specifically, the lock funds at prevailing higher interest rates
government assigned around one-half (46.1 offering about twice the net of maturity
percent) of the auction targets, on net of amounts. However, to avoid higher cost of
maturity basis, to PFLs followed by 22.3 percent borrowing, the government accepted only about
for variable rental rate (VRR) GoP Ijara Sukuks one-third of the offered amount in fixed rate
and 13.6 percent for T-bills. PIBs.
In overall terms, the market offered nearly Similar to the conventional market, the
double the target amount during FY23. Within government set higher targets (net of maturity)
T-bills, the government assigned most of the for VRR Shariah-compliant instruments.
targets (net of maturity) to 12-month bills However, the market’s interest in Islamic
followed by 6-month bills. Given the market
In view of a sharp increase in financing requirements, the government mobilized around three times of its pre-auction target
11
amount on net of maturity basis via conventional instruments.
50
Auction Summary Table 3.3

billion Rupees
Target Maturity Offered (competitive) Accepted (all)
Treasury Bills
Q1-FY23 4,950.0 5,061.3 9,731.1 5,023.9
Q2-FY23 5,800.0 5,798.7 9,641.2 5,235.5
Q3-FY23 5,400.0 5,104.0 8,207.9 5,255.3
Q4-FY23 8,275.0 7,726.6 14,387.2 10,957.0
FY23 24,425.0 23,690.6 41,967.4 26,471.7
Pakistan Investment Bonds
Fixed Rate
Q1-FY23 500.0 1,132.2 1,977.0 687.0
Q2-FY23 525.0 - 977.4 255.5
Q3-FY23 300.0 - 358.4 26.4
Q4-FY23 360.0 - 765.5 333.5
FY23 1,685.0 1,132.2 4,078.3 1,302.4
Floating Rate
Q1-FY23 620.0 - 2,123.7 1,253.4
Q2-FY23 840.0 292.3 3,147.9 2,152.7
Q3-FY23 970.0 - 1,908.1 1,396.7
Q4-FY23 1,030.0 682.3 1,048.0 552.4
FY23 3,460.0 974.6 8,227.7 5,355.2
Ijara Sukuks
GIS-FRR
Q1-FY23 65.0 78.1 19.7
Q2-FY23 120.0 5.6 0.2
Q3-FY23 110.0 6.2 1.2
Q4-FY23 120.0 241.7 113.9
FY23 415.0 - 331.6 135.0
GIS-VRR
Q1-FY23 195.0 220.3 101.1
Q2-FY23 280.0 372.0 243.8
Q3-FY23 360.0 112.8 35.5
Q4-FY23 370.0 591.1 355.5
FY23 1,205.0 - 1,296.2 735.9
Total FY23 31,190.0 25,797.4 55,901.2 34,000.2
instruments remained lukewarm in the first year VRR also remained low throughout the
three quarters of FY23 (Table 3.3). In H1-FY23, year, except for May and June 2023.
auction of GoP Ijara Sukuks only consisted 5-
year bonds, as the market did not find 5-year Another reason for lower offers in the Shariah-
FRR lucrative in an increasing interest rate compliant instruments was relatively tighter
environment, and shifted towards VRR. liquidity condition in the market for Islamic
Nonetheless, the introduction of 1-year and Banking Institutions (IBIs). Although, the
reintroduction of 3-year Ijara Sukuks in Q3-FY23 introduction of shorter-tenor Ijara Sukuks
revived market interest in these instruments. helped in managing this gap, the market could
Moreover, after the introduction of relatively not capitalize on the opportunity to earn higher
shorter-tenor Sukuks, the market did not make profit due to lower deposits. This, along with
any bids in 5-year FRR. Similarly, offers in 5- the mismatch between the maturity of OMO
(Open Market Operations) injections and the
51
Auction Summary of T-Bills Figure 3.12

6-month 12-month
3-month
Accepted (all) Offered Cut-off Accepted (all) Offered Cut-off
Accepted (all) Offered Cut-off -rhs
billion Rupees percent
24 billion Rupees percent billion Rupees percent
2,400 500 24 600 24
2,000 22
400 22 500 22
1,600 20
20 400 20
1,200 18 300
18 300 18
800 16 200 200 16
16
400 14 100 14 100 14
0 12 0 12 0 12
20-Apr-23
26-Jan-23
25-Aug-22
6-Oct-22
17-Nov-22
29-Dec-22
14-Jul-22
9-Mar-23
1-Jun-23
20-Apr-23
26-Jan-23
25-Aug-22
6-Oct-22
17-Nov-22
29-Dec-22
9-Mar-23
14-Jul-22
1-Jun-23
29-Dec-22
20-Apr-23
26-Jan-23
25-Aug-22
6-Oct-22
17-Nov-22
14-Jul-22
9-Mar-23
1-Jun-23
securities restricted participation in the market instance, the average quarterly spread between
for the Islamic debt securities. For instance, the the policy rate and yields on 12-month paper
longest tenor OMO is of 77 days, whereas the increased to 132.5 bps, 126.7 bps for 6-month
shortest tenor GoP Ijara Sukuk is of one year. In and 102.4 bps for 3-month paper in Q3-FY23.
view of these factors, the government mobilized
only 61.1 percent of its net of maturity target In overall terms, in response to a cumulative 825
amount from VRR and 32.5 percent from FRR. bps hike in the policy rate, the yield of 3-month
paper rose by 767 bps, whereas it increased by
Meanwhile, the increase in interest rates along 772 bps and 763 bps for 6-month and 12-month,
with high inflation expectations, economic respectively. On the other hand, the hike in the
uncertainties, external sector weaknesses and yield of longer-tenor instruments remained
limited financing avenues shifted the yield curve relatively low during FY23 with 315 bps increase
upward (Figure 3.13). This led to increase in in 5-year bonds, 240 bps in 10-year and 178 bps
spread between the secondary market yields for 20-year bonds, indicating monetary policy
and the policy rate, especially in H2-FY23. For easing in the long-run.
Interbank liquidity
Average Quarterly Yield Curve Figure 3.13
Q1 Q2 Q3 Q4 Liquidity requirements of the interbank money
percent market remained substantially higher in FY23
24 compared to last year. Several factors
22 contributed to increased demand for liquidity.
First, amid unavailability of external financing,
20 and restrictions on borrowing from the SBP, the
government mostly relied on commercial banks
18
to meet its financing requirements. Second, the
16 government made a net retirement of external
debt, over Rs 1 trillion in PKR terms, which
14
drained liquidity from the interbank market.
12 Third, the rising macroeconomic uncertainty
3M 6M 9M 1Y 3Y 5Y 10Y 15Y 20Y and escalating inflationary pressures resulted in
Source: State Bank of Pakistan a large expansion in currency in circulation that
rose by around Rs 1.6 trillion in FY23 compared
52
Liquidity Indicators, FY23 Figure 3.14

Outstanding OMO - rhs * Floor Policy rate Ceiling Overnight rate
billion Rupees percent
8,000
22
7,000
20
6,000
18
5,000 16
4,000 14
3,000 12
16-Dec-22
30-Dec-22
16-Jun-23
30-Jun-23
21-Apr-23
5-May-23
7-Oct-22
4-Nov-22
13-Jan-23
27-Jan-23
12-Aug-22
26-Aug-22
18-Nov-22
19-May-23
10-Feb-23
24-Feb-23
10-Mar-23
24-Mar-23
15-Jul-22
29-Jul-22
1-Jul-22
2-Jun-23
23-Sep-22
21-Oct-22
9-Sep-22
2-Dec-22
7-Apr-23
to Rs 662.5 billion in FY22. Lastly, on the supply ONR mostly remained above the policy rate,
side, deposit mobilization of commercial banks due to both increase in liquidity requirements
remained considerably lower in FY23. and the market’s expectation about further
monetary tightening because of rising
Keeping in view the significant pressures on inflationary pressures.
interbank liquidity conditions due to above-
OMO Mop-ups Table 3.4
mentioned factors, SBP provided liquidity amount in billion Rupees
through regular 7-day and longer-tenor OMOs. Total no. of Avg. amount
The average outstanding stock of OMOs more mop-ups per mop-up
than doubled to Rs 5,823.7 billion in FY23, from FY22 FY23 FY22 FY23
Rs 2,495.4 billion in FY22. The share of longer- Q1 1 6 203.0 432.9
tenor OMOs, 63-days and 77-days, rose Q2 2 5 47.7 178.2
Q3 0 4 - 503.1
substantially to 56.8 percent of overall liquidity
Q4 2 5 296.3 246.7
injections in FY23, compared to 5.0 percent last
Total 5 20 178.2 336.7
year.
Also, the frequency and volume of these longer- This is also evident from high activity on SBP
tenor OMOs considerably increased to meet corridor’s floor almost throughout FY23.13
market’s higher liquidity requirements. During Furthermore, the SBP conducted twenty OMOs
FY23, the SBP cumulatively injected Rs 32.5 to mop up excess liquidity from the interbank
trillion through 41 longer-tenor OMOs market, compared to 5 times last year, whereas
compared to around Rs 5.7 trillion through nine the volume of liquidity mopped up in each
longer tenor injections in FY22. The liquidity OMO nearly doubled to Rs 336.7 billion in FY23
thus injected via longer-tenor OMOs more than from Rs 178.2 billion in FY22 (Table 3.4).
sufficed the requirements of the market, thus the However, the volatility in ONR was lower in
ONR remained below the policy (target) rate Q4-FY23 than that observed in Q4-FY22 (Figure
most of the time (on 125 days) during FY23 3.15). In Q4-FY22, the market’s expectations of
(Figure 3.14). Meanwhile, with the exception of rate hikes in the light of rising inflationary
the last quarter, the ONR remained more pressures and growing borrowing needs of the
volatile in FY23, compared to FY22. 12 In FY22, government induced higher volatility in the
12The standard deviation of ONR increase to around 257 bps in FY23 compared to 218 bps in FY22
13In overall terms, the market used SBP repo facility 558 times and parked a cumulative sum of Rs 17.1 trillion during FY23,
compared to Rs 7.3 trillion placed on 217 occasions in FY22.
53
Deviation in Overnight Repo Rate Figure 3.15 Credit to Private Sector Figure 3.16
FY22 FY23 Private sector credit WALR- rhs
growth in percent percent
basis points 22 18
60
50 18 15
14 12
40
10 9
30
6 6
20
2 3
10
-2 0
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
0
Q1 Q2 Q3 Q4 Year
ONR. On the other hand, in Q4-FY23, the monetary policy.15 Moreover, a new framework
market was expecting the policy rate to either has been developed under which the SBP’s
decrease or remain unchanged; the policy rate operational involvement in the two largest
remained at 21 percent for most of the time in refinancing schemes (EFS and LTFF) is set to
Q4-FY23, which also resulted in fewer cease at the end of a 5-year transition period
deviations from the policy rate. beginning from July 2023.16 The borrowing
under the refinancing schemes has peaked out
To effectively manage the liquidity of IBIs, the since June 2022; while as of June 2023, the total
SBP started Shariah Compliant Mudarabah outstanding amount under EFS declined by 5.4
Based OMOs (injections only) in the fourth percent to Rs 688.4 billion from Rs 728.1 billion
quarter of FY22.14 The average outstanding as of June 2022 (Figure 3.17).
stock of these OMOs slightly increased to Rs
539.0 billion during FY23 from Rs 467.3 billion in Export Financing Scheme Figure 3.17
FY22. This increase indicates relatively tight (Outstanding Stock)
liquidity conditions in the Islamic based money billion Rupees
750
market (Mudarabah).
700
3.4 Credit to Private Sector 650

600
Credit to private sector declined by 0.8 percent 550
in FY23, compared to a growth of 21.1 percent 500
last year (Figure 3.16). A host of factors
450
discouraged private sector credit offtake during
FY23. First, the policy-driven moderation in the 400
Jun-20
Sep-20
Dec-20
Jun-21
Sep-21
Dec-21
Jun-22
Sep-22
Dec-22
Jun-23
Mar-21
Mar-22
Mar-23
pace of economic activity contained the credit

demand of industries. The SBP also linked the
rates on EFS and LTFF to the policy rate for Source: State Bank of Pakistan
strengthening the transmission mechanism of
14 Currently, this mechanism only allows Islamic banks to borrow from the central bank via OMO injections or through SBP reverse
repo (ceiling) facility; while OMO mop-ups and SBP repo (floor) facility are not available to IBIs.
15 SBP, on average, raised the rates of EFS (from around 4 percent in FY22) and LTFF (from around 5 percent in FY22) to over 13
percent in FY23. Source: IH&SMEFD Circular No. 6, 7, 11 and 13 of 2022, State Bank of Pakistan.
16 Source: International Monetary Fund (2023). Country Report No. 23/260. Washington D.C.: IMF
54
Current Capacity Utilization of Industry Figure 3.18 Credit Demand Slows Amid Table 3.5
percent Lower Economic Activity
90 growth in percent
FY22 FY23
80 Cost of production
Exchange rate* (PKR/USD) -9.8 -28.5
71 Electricity tariffs 22.6 25.6
70 Domestic fuel prices 37.8 62.0
Cotton prices 69.1 8.8
60 Sugarcane prices 13.6 27.5
60
Construction input items 11.4 32.5
Economic activity
50 LSM 11.7 -10.3

Car sales 54.9 -58.7
Apr-22
Mar-23
Apr-23
Aug-21
Jun-21
Dec-21
Aug-22
May-23
Jun-22
Dec-22
Jun-23
Oct-21
Feb-22
Oct-22
Feb-23
PoL sales 14.4 -26.5

Cement dispatches -1.0 -16.0
Source: Business Confidence Survey, State Bank of Pakistan
PSDP 33.5 17.1
The slowdown in credit to private sector Remittances 6.2 -13.6
*Bank floating average exchange rates
businesses mainly came from working capital
Sources: SBP, MoF, PBS, PAMA, World Bank
loans, while growth in fixed investment loans
decelerated. According to the SBP’s Bank refined petroleum sectors.17 This also led to a
Lending Surveys during FY23, the overall decline in capacity utilization during FY23
demand for loans declined due to multiple (Figure 3.18).
factors, including deterioration in economic
conditions, political uncertainty and increased A mix of demand and supply side factors
cost of borrowing. The lower demand for credit contained textile sector’s working capital
is also in line with 5.1 percent decline in total requirements
number of loan applications received by banks
in FY23 over last year. Textile sector working capital loans slumped to
Rs 55.9 billion in FY23, compared to Rs 237.7
On the demand side, the slowdown in domestic billion last year (Table 3.6). Several factors have
economic activity and construction led to contributed to this decline. First, the overall
significant fall in credit uptake (Table 3.5). demand for textile products has been affected
Moreover, the flood-related disruptions and FX both in the domestic as well as international
constraints, that led the government and the SBP markets, which is in line with a slowdown in
to introduce various measures to contain local and export sales of the textile sector during
domestic demand and imports during FY23, also Jul-Mar FY23, compared to the same period last
impinged on economic activity and hence year (Figure 3.19). On the international front,
private sector borrowings. In particular, slower economic activity amid rising cost of
constrained availability of raw materials living and mortgage rates have affected the
resulted in partial closure of various businesses demand for the country’s textile products, as
in the manufacturing sector during the review reflected by lower export volumes of major
period, which include textiles, automobiles and textile products during the period (Chapter 6).
Second, the textile industry was also affected by
17Source: Pakistan Stock Exchange, Nishat Chunian Ltd. (www.dps.psx.com.pk/download/document/199808.pdf); Crescent Fibres
Ltd. (www.dps.psx.com.pk/company/CFL); Pak Suzuki Motor Company Ltd.
(www.dps.psx.com.pk/download/document/205072.pdf); Indus Motor Company Ltd.
(www.dps.psx.com.pk/download/document/207293.pdf); Attock Refinery Ltd.
(www.dps.psx.com.pk/download/document/207869.pdf)
55
Loans to Private Sector Businesses Table 3.6

flows in billion Rupees
Total Loans* Working Capital** Fixed Investment
FY22 FY23 FY22 FY23 FY22 FY23
Private Sector Businesses 1,215.5 31.1 698.8 -145.0 451.4 173.8
Manufacturing 903.0 89.4 610.0 -39.9 279.6 128.8
Textile 364.1 95.2 237.7 55.9 122.2 40.3
Refined petroleum 2.9 47.2 4.4 45.4 -1.5 1.9
Basic pharmaceutical products 11.0 17.3 9.2 15.7 0.0 1.9
Cement, lime and plaster 42.6 36.5 7.9 9.9 34.3 27.0
Wearing apparel 53.8 10.4 42.8 5.9 8.9 4.6
Rice processing 33.1 3.3 27.2 4.7 5.7 -1.4
Vegetable and animal oils and fats 6.2 1.9 4.4 0.8 1.5 1.1
Sugar 47.3 -12.3 49.2 -1.2 -1.9 -11.4
Fertilizers -1.5 -8.4 -9.9 -6.1 8.4 -2.3
Motor vehicles 29.9 -12.8 18.2 -13.0 10.7 1.2
Paper & paper products 40.9 3.9 24.9 -15.9 16.0 19.7
Basic chemicals 31.0 -3.9 24.4 -20.5 6.6 16.7
Basic iron and steel 44.2 -35.5 32.4 -37.6 11.8 2.3
Telecommunications 91.2 63.2 -4.3 14.9 95.4 48.3
Agriculture, forestry and fishing 34.2 17.9 19.2 -6.2 13.9 24.2
Construction 33.9 1.9 -0.4 9.4 -4.4 1.0
Real estate activities 6.2 -0.8 0.7 0.7 0.7 -2.3
Mining and quarrying -3.1 14.4 -8.6 16.9 5.5 -2.5
Power generation, transmission and distribution 58.8 -47.6 17.2 -41.8 41.7 -5.8
Transportation and storage 13.5 -8.4 10.0 -2.3 2.9 -6.1
Wholesale and retail trade 69.3 -69.9 64.3 -73.6 2.7 -9.1
*Total loans in FY22 and FY23 include net borrowings of Rs 65.3 billion and Rs 2.3 billion, respectively, under construction
financing. The data on credit/loans has been revised since June 2020 due to inter-sectoral adjustment in private sector business (see
IH&SMEFD Circular Letter No. 28 of 2020). Therefore, in this table, total loans may not be necessarily equal to the sum of working
capital and fixed investment loans ** working capital includes trade financing
the discontinuation of Regionally Competitive

Textile Sector Sales (net)* Figure 3.19
Energy Tariffs (RCET) in June 30, 2022.18
Local Export
billion Rupees
Third, floods severely affected cotton crop 250
production, which fell by 41.0 percent in FY23.19
200
Lower availability of domestic cotton for textile
industry was instrumental in driving down the 150
production of cotton yarn and cotton cloth 100
(major textile items) by 22.1 percent and 12.4 50
percent, respectively, in FY23, which also
translated into lower credit offtake by the 0
FY20 FY21 FY22 FY23
industry. -50
* July-March
Fourth, as mentioned above, the linking of the Source: State Bank of Pakistan- quarterly financial
EFS rates with the policy rate resulted in the EFS statement analysis of selected listed non-financial
rate rising to over 13 percent on average in FY23 companies
18 Source: APTMA press release dated July 21, 2022, (www.aptma.org.pk/wp-content/uploads/2023/08/16.-21st-July-2022.pdf)

19 Source: Ministry of Finance (2022-23). Pakistan Economic Survey. Islamabad: Ministry of Finance.
56
Gross NPLs of Textile Sector Figure 3.20 32.4 billion last year. This reflected sluggish
billion Rupees construction activity in both public and private
185 sectors, which pared demand for construction-
180 allied sectors, including iron and steel. This can
175 be seen from a deceleration in PSDP spending
from 33.5 percent in FY22 to 17.1 percent in
170
FY23. Furthermore, weakening incomes, decline
165 in remittances, crop losses and a general
160 downturn in economic activity contributed to
155 the slack in private sector construction activities.
In addition, import constraints and reduced
150
availability of construction material, also
Mar-21
Mar-22
Mar-23
Jun-20
Sep-20
Dec-20
Jun-21
Sep-21
Dec-21
Jun-22
Sep-22
Dec-22
Jun-23
weighed on borrowing needs of the sector.22

Among the non-manufacturing sector,
from around 4 percent in FY22, might have wholesale and retail trade retired loans of Rs
resulted in lower borrowing. The textile sector 73.6 billion in FY23, compared to an offtake of
performance was also reflected by the increase Rs 64.3 billion last year. The previous year’s
in gross non-performing loans (NPLs) (Figure increase was due to higher borrowings by major
3.20). oil marketing companies (OMCs) to finance the
import of petroleum products. In FY23,
Rising inventory levels along with however, an overall slowdown in economic
worsening financial position raised activity dampened the demand for petroleum
products, which led the OMCs to retire loans
working capital needs of petroleum refining
(Table 3.5).23 Further loan retirements came
Refined petroleum, was one of the few sectors, from the wholesale businesses of fertilizers, as
where credit offtake was higher than last year. relatively lower international DAP (Di-
This increased borrowing is attributed to the Ammonium Phosphate) prices during FY23
sector’s deteriorating financial position. Some of contained the borrowing needs of wholesalers. 24
the major oil refineries had temporarily shut Moreover, the lower demand for loans is also
down their distillation units in order to manage explained by a 63.5 percent decline in the
the higher inventory levels, which rose by 66.0 imports of DAP.
percent owing to the fall in demand for
petroleum products during FY23.20,21 Fixed investment loans lost momentum
Slowdown in construction activities led to The fixed investment loans decelerated to Rs

173.8 billion in FY23, compared to an offtake of
a net retirement in credit by iron and steel
Rs 451.4 billion last year. The entire increase
sector
was concentrated in H1-FY23; as the pace of
A major drag to working capital loans came disbursement under the SBP’s concessionary
from a net retirement of Rs 37.6 billion by iron financing schemes (LTFF and TERF) tapered-off
and steel firms, compared to an offtake of Rs in the second half (Figure 3.21). In fact, the
20 Source: Pakistan Stock Exchange, also available at: www.dps.psx.com.pk/download/document/207869.pdf

21 Source: SBP; Quarterly Financial Statements Analysis of Selected Listed Non-Financial Companies, March 31, 2023.
22 Steel manufacturing declined by 5.1 percent during FY23, over last year.
23 Petroleum products sales posted 26.5 percent y/y decline during FY23. Likewise, the import volume of petroleum products also
dropped by 38.4 percent during the year.

24 Average DAP prices in the international market dropped by 13.6 percent during FY23 (Source: World Bank).
57
Gross Disbursements under Figure 3.22

Fixed Investment Loans Figure 3.21
LTFF and TERF
flows in billion Rupees TERF LTFF LTFF & TERF share- rhs
300
200 billion Rupees percent 18
250
200 160 15
150 12
120
100 9
80
50 6
0 40 3
-50 0 0
H1 H2 H1 H2 H1 H2 H1 H2
H1-FY20
H2-FY20
H1-FY21
H2-FY21
H1-FY22
H2-FY22
H1-FY23
H2-FY23
FY20 FY21 FY22 FY23
share of LTFF and TERF disbursements in total to Rs 48.3 billion during FY23, compared to an
fixed investment loans declined from 15.0 offtake of Rs 95.4 billion last year. A major
percent in FY22 to 5.6 percent in FY23 (Figure telecom firm availed syndicate financing for
3.22). injecting equity into its wholly-owned
subsidiary, besides capacity expansion.
Lower loan disbursements under LTFF may be
attributed to linking of LTFF rates with the Consumer financing dropped
policy rate aiming to strengthen the monetary
transmission, as the financing rates under LTFF Consumer loans posted a net retirement of Rs
rose from 5.3 percent in FY22 to 13.7 percent in 40.4 billion in FY23, compared to an offtake of
FY23, on average. Meanwhile, the slowdown in Rs 192.2 billion last year (Table 3.7). While
disbursements under TERF is due to the loans to consumers remained lackluster for all
maturity of the scheme in March 2021. Out of segments, the major drag came from automobile
the approved amount, most of the loans.
disbursements were made in FY22.25
The downtrend in overall consumer loans is
Within the manufacturing sector, textile primarily attributed to high borrowing cost, as
dominated fixed investment loans by borrowing reflected by increase in the average WALR to
Rs 40.3 billion in FY23, compared to an offtake 17.5 percent during FY23, from 10.2 percent last
of Rs 122.2 billion last year. The textile firms
borrowed for enhancing production capacity, Consumer Financing Table 3.7
and to reschedule loans. Other than textile, flows in billion Rupees
cement industry was a notable borrower of long- FY21 FY22 FY23
term loans within the manufacturing sector. Total Consumer Financing 174.0 192.2 -40.4
Major cement manufacturers borrowed long- Credit cards 12.0 17.7 21.0
term loans for capacity expansion and House building 23.8 97.1 11.6
investment in the renewable energy sources. 26 Personal loans 43.0 16.4 1.2
Consumers durable -1.8 1.2 0.0
Auto loans 97.0 59.7 -74.1
In the non-manufacturing sector, the telecom
sector availed fixed investment loans amounting
25 As of end-June 2023, Rs 394 billion (over 90 percent) of the total approved amount of Rs 436 billion under TERF has been
disbursed to the private sector businesses.
26 For details, see Chapter 3 of SBP’s Half Year Report FY23 on the State of the Pakistan’s Economy.
58
Automobile Loans Figure 3.23

Auto loans Weighted average lending rate - rhs
flows in billion Rupees percent
15 21
18
10
15
5 May-22: SBP amended 12
PRs for consumer financing
0 9
6
-5 Sep-21: SBP issued
prudential regulations (PRs) 3
-10 for consumer financing 0
Apr-21
Apr-22
Apr-23
Jan-21
Jan-22
Jan-23
Aug-20
Nov-20
May-21
Aug-21
Nov-21
May-22
Aug-22
Nov-22
Sep-20
Dec-20
Jun-21
Sep-21
Dec-21
Jun-22
Sep-22
Dec-22
May-23
Jun-23
Mar-21
Mar-22
Mar-23
Oct-20
Feb-21
Oct-21
Feb-22
Oct-22
Feb-23
Jul-20
Jul-21
Jul-22
year (Figure 3.23). Besides higher interest rates, 3.5 Inflation

SBP’s macro-prudential measures also restricted
auto finance. In September 2021, and later in The average headline National CPI (NCPI)
May 2022, SBP had introduced several inflation rose to 29.2 percent in FY23, from 12.2
amendments to the Prudential Regulations (PRs) percent in FY22. The surge in inflation was
for consumer financing aiming to moderate the broad-based with non-perishable food items
auto loans by increasing the down-payment having a dominant contribution, followed by the
requirement and reducing the maximum tenure Non-Food Non-Energy (NFNE) and energy
of auto financing.27 Moreover, in May 2022, group (Table 3.8). A host of domestic and
banks were required to obtain prior approval global supply shocks led to the surge in
from the SBP at the time of opening L/Cs of 25 inflation, including: (i) flood-induced domestic
high value capital goods, including CKD cars. 28 food shortages; (ii) increase in energy prices; (iii)
exchange rate depreciation; and (iv) domestic
In addition, the automobile manufacturers supply constraints arising from raw material
raised car prices, owing to the increase in cost of shortages. Moreover, rising domestic
production, which further pared the demand for uncertainty also compounded price pressures
vehicles. This is in line with 58.7 percent decline during the year.
in car sales during FY23 over last year.
Inflationary pressures intensified during the
Apart from auto loans, house-building loans
second half of FY23, with the worsening impact
also decelerated amid sluggish construction
of supply shocks (Figure 3.24). The impact of
sector. Borrowing for house-building segment
escalating food and energy inflation spilled over
dropped to Rs 11.6 billion during FY23,
to general prices, which increased costs and also
compared to an offtake of Rs 97.1 billion last
raised inflation expectations, pushing core
year.
27 The PRs issued in September 2021 included: (i) reduction in maximum tenure of the auto finance facility from seven years to five
years; (ii) maximum limit of Rs 3 million in aggregate, allowed to be availed by a person from all banks/DFIs; (iii) increase in the
minimum down payment for auto financing from 15 percent to 30 percent. In May 2022, two main amendments were introduced in
the existing PRs: (i) The maximum tenure of auto finance facility was reduced from 5 years to 3 years for vehicles above 1,000 cc,
and from 7 years to 5 years for vehicles up to 1,000 cc; and (ii) the PRs issued earlier to be applicable on financing for all locally
assembled/ manufactured vehicles. Source: SBP, BPRD Circular Letter No. 29 of 2021, and BPRD Circular Letter No.19 of 2022.
28 Source: State Bank of Pakistan. (www.sbp.org.pk/epd/2022/FECL9.htm)
59
Average CPI Inflation and Contribution Table 3.8

percent
Urban Rural
Items Wt.* H1-FY23 H2-FY23 FY22 FY23 Cont.* Wt.* H1-FY23 H2-FY23 FY22 FY23 Cont.*
CPI 100.0 23.1 30.4 11.8 26.8 100.0 27.9 37.0 12.6 32.6
Food & non-alcoholic
30.4 30.7 42.8 13.7 37.0 11.8 40.9 33.9 47.9 13.2 41.2 17.6
beverages
Perishable food items 4.5 45.6 38.2 7.5 41.8 1.9 5.8 49.9 42.6 9.0 46.1 2.7
Non-perishable food 26.0 28.2 43.5 14.7 36.2 10.0 35.1 31.4 48.7 13.9 40.5 14.9
Wheat 0.6 48.6 83.4 10.9 66.8 0.5 3.5 46.6 86.7 9.2 67.6 2.6
Wheat flour 3.0 31.2 81.1 16.0 56.7 1.7 3.4 28.8 75.4 15.9 52.8 1.9
Cooking oil 1.1 56.2 36.6 49.9 45.1 0.7 0.6 56.5 28.7 55.4 40.6 0.4
Meat 2.0 24.5 19.9 20.7 22.1 0.5 1.7 24.7 19.8 21.0 22.1 0.5
Milk fresh 7.1 26.9 33.8 12.5 30.5 2.1 10.4 26.1 37.5 11.0 32.0 3.0
Veg. ghee 1.0 51.9 28.6 50.4 38.8 0.6 2.4 55.9 26.0 52.6 38.8 1.5
Pulse masoor 0.2 65.8 20.2 32.1 40.0 0.1 0.2 72.4 24.1 31.1 45.0 0.1
Tea 0.8 42.4 94.8 8.2 69.5 0.6 1.3 38.8 87.5 7.7 64.0 0.7
Clothing and footwear 8.0 18.1 19.7 10.8 18.9 1.5 9.5 16.3 20.8 9.9 18.6 1.8
Housing, Elec., Gas 27.0 10.8 12.2 9.6 11.5 3.0 18.5 19.1 19.6 13.5 19.4 3.4
Electricity charges 4.6 31.4 19.9 22.6 25.6 1.2 3.4 31.4 19.9 22.6 25.6 0.9
Furnish. & H.H equip. 4.1 24.9 38.0 11.9 31.7 1.3 4.1 26.3 38.6 13.7 32.8 1.3
Health 2.3 12.7 18.4 9.7 15.6 0.4 3.5 16.6 19.4 9.0 18.0 0.6
Transport 6.1 53.1 43.9 24.4 48.1 3.3 5.6 57.2 46.0 23.4 51.1 3.0
Motor fuel 2.9 70.5 55.1 37.5 62.0 2.3 2.5 73.4 58.1 37.1 64.9 2.0
Communication 2.4 1.5 6.9 3.2 4.2 0.1 2.0 1.3 2.6 1.0 2.0 0.0
Recreation & culture 1.7 22.9 58.7 8.3 41.2 0.6 1.4 27.8 59.2 9.3 44.0 0.5
Education 4.9 10.6 7.3 4.9 8.9 0.4 2.1 9.9 15.3 4.5 12.6 0.2
Restaurants and hotels 7.4 28.5 38.8 12.7 33.9 2.5 6.2 26.7 33.4 12.3 30.2 1.8
Misc. goods & services 4.8 22.3 36.4 10.4 29.6 1.5 5.0 21.4 36.7 10.9 29.3 1.5
NFNE 53.7 14.1 18.2 8.1 16.2 8.2 42.6 17.4 23.5 9.0 20.6 8.3
*wt. = weight and Cont.= Contribution for FY23
Sources: Pakistan Bureau of Statistics and SBP calculations
inflation to a multi-year high in FY23. This was Aside from the impact of supply shocks,
despite a notable contraction in domestic upsurge in inflation during FY23 also
demand. represented the impact of delayed structural
Composition of CPI Inflation Figure 3.24

Perishable food items Non-perishables*
Energy index NFNE 40 percent
40 percent Rural
Urban 30
30
20
20
10 10
0 0
Mar-22
Mar-23
Sep-21
Sep-22
May-22
May-23
Jul-21
Jul-22
Nov-21
Nov-22
Jan-22
Jan-23
Sep-21
Nov-21
Sep-22
Nov-22
Jan-22
Jan-23
May-22
May-23
Mar-22
Mar-23
Jul-21
Jul-22
*Inclusive of alcohol beverages and readymade food

60
reforms as well as a large and unsustainable shortages stemming from floods and
fiscal deficit. Specifically, inflation in energy constrained availability of imported items as
sector that contributed more than one-tenth to well as multifarious structural impediments in
overall inflation during FY23, reflected the the non-perishable food group (Box 3.1).
impact of chronic inefficiencies in the energy
sector. Supply shortages and weakening Rupee
intensified food inflation
The broader fiscal consolidation efforts by the
government during FY23 for arresting circular Food inflation soared to around three times of
debt and increasing revenue, resulted into the last year’s level in both rural and urban areas
upward adjustments in administered energy and contributed more than half to headline
prices on multiple occasions during FY23, NCPI inflation during FY23.29 Particularly,
despite the downtrend in the global energy steady increase in the prices of non-perishable
prices during the second half of FY23. On the items including milk and its products, wheat,
other hand, food inflation that spiked to 39.0 readymade food and edible oil drove the
percent in FY23 depicted the impact of supply uptrend in food inflation.
Box 3.1: Challenges in Controlling Food Inflation in Pakistan
SBP has increased the policy rate by a cumulative 1500 bps since September 2021, to 22 percent in June 2023, to
anchor inflation expectations and to contain seepage of food and energy prices to broader prices in the economy.
However, maintaining price stability in the medium to long-term would also require plugging the domestic policy
lacunas, inefficiencies and structural issues in several sectors, one of which is the food supply chain. Pakistan’s food
supply chain is underdeveloped and is vulnerable to global supply shocks through consistent food imports. A
breakdown of inflation into its components shows food group alone contributed more than half in headline CPI
inflation, while non-perishable food items remained a major driver of food inflation during FY23 (Figure 3.1.1).30
The break-up of food inflation shows that food grains (wheat, wheat flour, rice and pulses), livestock products (meat
and milk), and cooking oil and vegetable ghee remained dominant contributors during the past two decades (Figure
3.1.2). Multifaceted factors are responsible for persistent increase in prices of these commodities. These include,
among others growing climate change challenges, lack of focus on seed market, livestock sector development and
imperfections in the food market.
Mitigating structural bottlenecks in development of livestock sector. Surging fresh milk and meat prices contributed
over one-quarter to food inflation, due to widening supply-demand gap of livestock products, in the past two
decades. Over the years, the rising demand pressures, driven by income levels, shifting consumers’ preferences and
increasing exports of meat, in the absence of corresponding improvement in supplies have led to a significant
increase in prices of milk and meat in the domestic market.
A number of factors have arrested the growth potential of livestock sector in the country. Livestock farming is
mostly an informal activity in Pakistan, characterized by sub-optimal animal rearing practices given lack of nutrient-
rich feed and poor extension services that have squeezed milk and meat yields below global averages. 31 In addition,
overreliance on undeveloped indigenous breeds, high startup and operational cost of dairy business, seasonal fodder
shortages, widespread animal diseases, inadequate value chain, and poor pricing mechanism of livestock products
29 Food inflation surged by 37.6 percent and 41.1 percent in urban and rural baskets during FY23, as opposed to 13.4 percent and 13
percent in FY22 for urban and rural regions, respectively.
30 Inflation indices in Figure 3.1.1 and 3.1.2 are based on following base years: FY02-08 on base year of FY00, FY09-16 on FY08, and
FY17-23 on FY16.
31 Extension services aim at improving productivity of the agriculture sector by spreading knowhow about efficient agriculture
practices through transfer of knowledge.
61
State Bank of Pakistan Annual Report 2022-23
are some other factors restraining growth potential of livestock Contribution to CPI Inflation Figure 3.1.1
products.32 To close the demand-supply gap of livestock Perishable food Non-perishable food
NFNE Energy
products, there is a need to focus policy efforts on addressing
supply chain issues, with special attention on: (i) conducting a 100%
livestock census to provide reliable estimates of latest livestock 80%
production trends in the country, to help informed decision
making; (ii) developing feed industry, to ensure domestic 60%
availability of animal feed at affordable prices; (iii) creating 40%
awareness about effective means to handle seasonal fodder
shortages; (iv) strengthening livestock extension and 20%
veterinary services, to increase awareness of livestock farmers
0%
about effective animal rearing practices and management of
livestock diseases; (v) establishing and maintaining -20%
infrastructure for livestock value chain; (vi) revamping
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
FY19
FY21
FY23
marketing system to ensure fair prices; and (vii) policy
attention on commercial livestock farming. Sources: Pakistan Bureau of Statistics, and State Bank of
Pakistan calculations
Enhancing crop productivity: Despite being an agricultural country, Pakistan is not able to adequately meet its
domestic food requirement, including wheat and sugar. Similarly, while the country is ranked among one of the
large producers of rice, the domestic prices of rice frequently witness double-digit increases. In fact, Pakistan has
mostly remained a net importer of food commodities, especially edible oil, pulses, tea – and occasionally sugar and
wheat (Figure 3.1.3).
This has increased the country’s vulnerability to global price shocks and adverse exchange rate movements. Both
these factors have also intensified domestic shortages contributing to food inflation during the last few years.
In order to improve crop yields, the government encourages production and use of fertilizers through various
incentives, such as provision of subsidized gas to fertilizer manufacturing plants as well as direct price subsidy to
farming community. However, falling domestic gas production, sharp increase in international LNG prices, and
limited fiscal space have constrained the government’s ability to sustain such subsidies.
Drivers of Non-perishable Figure 3.1.2 Net Food Imports of Pakistan Figure 3.1.3
Food Inflation billion US$
Food grains Meat 4
Milk based Chicken and eggs
Ghee and oil Sugar/honey/gur 3
Others
percentage points contribution 2
10
8
1
6
4
0
2
0
-1
-2
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
FY19
FY21
FY23
Sources: Pakistan Bureau of Statistics, and State Bank of Sources: Pakistan Bureau of Statistics, and State Bank of
Pakistan calculations Pakistan calculations
32 Sources: (i) S. K. Jafri, S. Z. Hussain, and A. Abbasi (2022). “Analyzing Meat Export Potential in Pakistan”, SBP Staff Note 3/22.
(ii) M. A. Sattar (2020). “What is Holding Back Milk Production in Pakistan?”, PIDE Blog (iii) A. A. Burki and M. A. Khan (2016).
“Economic Impact of Dairy Sector in Pakistan: Lessons from the Past to Build a Resilient Future”. First Edition. Lahore University
of Management Sciences.
62
Furthermore, such measures do not address the factors underlying low agriculture productivity and market
imperfections. Food market imperfections are pervasive at both the pre-harvest and the post-harvest stages. These
mainly include: (i) inefficiencies in the seed market in the form of inadequate policy focus on R&D to develop climate
change resistant and high yielding crop varieties, unabated proliferation of spurious seeds and ineffective agriculture
extension services; (ii) issues in the use of crop nutrients; and (iii) imperfections in food market stemming from
information asymmetries, informal trade with neighboring countries, administrative weaknesses across the
wholesale and retail chain, and deficient storage facilities.33 The literature suggests availability of better seeds alone
can improve crop yields by around 15-20 percent, while optimal use of other inputs such as fertilizer, pesticides and
irrigation, can enhance crop productivity by up to 45 percent.34
In order to ensure agriculture sector’s preparedness for climate change, the focus should be on resolving structural
weaknesses in seed market. In this regard, following aspects are important: (i) strengthening the monitoring,
supervision and legal framework to check spread of spurious seeds; (ii) abating financial and human resource
constraints of public sector R&D institutions to encourage development of high yielding seed varieties; (iii)
leveraging and facilitating foreign investment in seed sector and to incentivize joint partnerships with MNCs; and
(iv) proper enforcement of the existing Intellectual Property Right (IPR) regime to encourage domestic and foreign
investment for development of new seed varieties.
Another important issue is poor extension services to improve farmers’ knowhow about efficient crop management
practices that leads to unbalanced use of fertilizer, which have eroded soil quality overtime, limiting the gains from
these crop nutrients.35 This situation warrants upgrading human resource base in extension services departments to
ensure sustainability of gains from fertilizer application.
Post-harvest food market inefficiencies include imperfections stemming from information asymmetries, informal
trade with neighboring countries, administrative weaknesses across the wholesale & retail chain, and deficient
storage facilities.
Facilitating market development for food commodities and buildup of storage facilities in the private sector. The
policy efforts should aim at constituting timely information sharing mechanisms about likely demand-supply gap of
food commodities based on estimates of consumption and available stocks of the commodities, future price trends,
expected weather patterns and timely forecasts of impact of extreme weather events on production size. This
information is not only critical for farmers, but also support relevant authorities to manage domestic supplies, in the
case of crop failures due to adverse weather conditions. The development of dynamic information systems would,
however, require improving human capital base in relevant federal and provincial government agencies, use of latest
technologies, such as satellite imaging to monitor crop size, and coordination between various government agencies.
In this backdrop, the need for policy attention to address agriculture sector inefficiencies by alleviating market
imperfections in the food sector, reforming seed market to ensure wide scale availability and adoption of high
yielding, climate-change resistant seed varieties, and development of livestock sector can hardly be over emphasized
to attain price stability in the country.
Rising cost of feed spurred increase in milk milk powder and other dairy products,
prices contributed about 2.4 and 3.3 percentage points
to average inflation in urban and rural areas,
Increase in prices of milk, including fresh milk, respectively, during FY23.
33 Source: (i) S. K. Jafri, M. Imran, and M. H. Asif (2022). “Investigating Pakistan’s Seed Industry Dynamics”, SBP Staff Note 2/22.
(ii) A. Khalid and Sabahat (2020). “Price Stabilization Mechanism in Pakistan’s Food Market: Exploring Issues and Potential
Challenges”, SBP Staff Note 2/20.
34 (i) A. A. Ali (2016). “Role of seed and its technological innovations in Indian agricultural sector” Bioscience Biotechnology
Research Communications, 9(4), 621-624. (www.doi.org/10.21786/bbrc/9.4/8). (ii) S. R. Paroda (2013). “Indian Seed Sector: The
Way Forward”, Lecture, Indian Seed Congress, Gurgaon, Haryana.
(www.nsai.co.in/storage/app/media/Dr.%20Raj%20Paroda%20Lectures%20-%20NSAI_13-2- 2013_Corrected.pd)
35 M. Ali, F. Ahmed, H. Channa, and S. Davies (2016). “Pakistan’s Fertilizer Sector Structure, Policies, Performance and Impacts.”
International Food Policy Research Institute, Discussion Paper, 01516.
63
Livestock Feed Prices Figure 3.25 Price Trends in Wheat and Figure 3.26
Maize Sorghum / Jowar Wheat-based Products (Urban)
Milk fresh (urban) Oil cakes (rhs) Wheat Wheat flour Wheat products
yoy growth in percent yoy growth in percent yoy growth in percent
80 120 120
70 105 100
60 90
50 75 80
40
60
30 60
45
20
10 30 40
0 15
0 20
-10
-20 -15 0
Mar-22
Mar-23
Jan-22
Jan-23
Nov-21
May-22
Nov-22
May-23
Sep-21
Sep-22
Jul-21
Jul-22
Sep-21
Sep-22
Jan-22
Jan-23
Nov-21
May-22
Nov-22
May-23
Mar-22
Mar-23
Jul-21
Jul-22
Jul-23
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics
One of the main reasons was a surge in cost of Importantly, floods not only damaged the wheat
livestock feed such as maize and oil cakes, due storage facilities of both the government and the
to flood-related supply shortages (Figure 3.25). rural community, the concerns about delay in
Moreover, floods resulted in loss of a significant drainage of standing water from fields caused
number of animals and disrupted road doubts about the wheat outlook for the
networks, particularly within Sindh and upcoming year as well. 39 Additionally, there
Balochistan.36 Furthermore, increase in was approximately half a million ton of export
transportation and labor costs on account of to Afghanistan through unofficial trade.40 To
hike in oil prices also added to milk prices.37 allay concerns over supply situation, the country
increased wheat imports to 2.7 million tons
Supply shortages impacted wheat prices during FY23, compared to 2.2 million tons last
year. However, the rising prices in international
Wheat flour prices in urban and rural areas shot market partly neutralized the impact of
up by 56.7 percent and 52.8 percent in FY23, as improvement in supplies.
opposed to 16.0 percent and 15.9 percent in the
preceding year. Wheat prices were already on Moreover, provincial governments of Sindh and
the rise since start of FY22 due to decline in Punjab announced a sizeable increase in MSP of
wheat production and rising international wheat wheat from Rs 2,200 per 40kg to Rs 4,000 and Rs
prices on account of Russia Ukraine war. The 3,900 per 40kg respectively for the crop year of
post-flood shortages as well as increase in 2023-24.41 This decision further strengthened the
minimum support price (MSP) catalyzed the rise increase in prices. Specifically, rising concerns
in wheat prices FY23 (Figure 3.26).38 over supply situation exacerbated the uptrend in
36 Ministry of Planning Development & Special Initiative (2022). Pakistan Floods 2022 Post-Disaster Needs Assessment. Islamabad:
MoPDSI
37 Pakistan Dairy Association, Press Release No. DSA\PDA\PM\020 Dated 11th February 2021 (available at:
www.pda.com.pk/2021/02/19/letter-to-the-pm/ accessed on August 11, 2023.

38 FAO (2022). GIEWS Special Report. No. 351. Rome: FAO
39 Farmers store approximately 60 percent of their wheat production the purpose of personal consumption and seed for the next
season. Source: USDA (2020). United States Department of Agriculture Grain and Feed Report, April 2020. Islamabad: USDA
40 USDA (2023). Grains and Feed Update June 2023. Report Number: PK2020-0022 Islamabad: USDA.
41 Space and Upper Atmosphere Research Commission (2022). PAK-SCMS Bulletin. Volume XII, Issue 03, Serial No. 135 1-March
2022 and Space and Upper Atmosphere Research Commission (2023) Volume XII, Issue 12, Serial No. 144 1-December 2022.
Karachi: SUPARCO; DG Public Relations, Government of Punjab
(dgpr.punjab.gov.pk/node/16960#:~:text=The%20spokesperson%20of%20Food%20Department,on%20that%20fixed%20support%2
0price, accessed on August 18, 2023)
64
Prices of Edible Oils Figure 3.27 Poultry and Meat Prices (Urban) Figure 3.28
Chicken Eggs Meat - rhs
Cooking oil (urban) Vegetable ghee (rural)
yoy growth in percent yoy growth in percent
Palm oil (global) - rhs
120 30
yoy growth in percent US$/MT
100 2000 100
25
80
80 20
1500 60
60 40 15
1000
40 20
10
500 0
20 5
-20
0 0 -40 0
Nov-21
May-22
Nov-22
May-23
Sep-21
Mar-22
Jan-22
Sep-22
Mar-23
Jan-23
Jul-21
Jul-22
Nov-21
May-22
Nov-22
May-23
Sep-21
Jan-22
Sep-22
Jan-23
Mar-22
Mar-23
Jul-21
Jul-22
Sources: State Bank of Pakistan and World Bank Source: Pakistan Bureau of Statistics
prices of wheat and its flour during the second of readymade foods, mainly drove up the
half of the year (Figure 3.26). readymade food prices by 37.0 percent and 33.6
percent in FY23, in urban and rural areas,
Rupee depreciation mainly explains rising compared to 13.7 percent and 14.1 percent rise in
edible oil prices FY22.
Edible oil was one of the major contributors to Rice prices, witnessed a steep increase of 59.7
food inflation in both urban and rural areas, percent in urban areas in FY23, as compared to
explaining around one-tenth of overall food 11.1 percent in FY22. This surge mainly came
inflation during FY23.42 However, the pace of from 21.0 percent dip in rice production due to
increase in edible oil prices slightly eased, floods in FY23. Similarly, the prices of poultry
especially during the second half of FY23 in both and meat rose significantly over last year
urban and rural baskets (Figure 3.27). The (Figure 3.28). This can partly be attributed to
decline in international palm oil prices primarily damages caused by floods, which not only
drove this trend. affected the animal population but also
disrupted transportation routes.43 Another
However, despite an average 32.4 percent dip in
contributing factor was issues in soybean
international palm oil price in FY23, domestic
imports that led to increased feed prices and
edible oil prices remained high mainly due to
subsequently higher chicken and egg prices. 44
weak local currency and some delays in the
clearance of imports. In addition, a general
Similarly, rising operational cost of the sector
increase in cost of production amid elevated
further strengthened the price increase in
energy prices, also contributed to higher
readymade food. Due to the limited availability
domestic edible oil prices in FY23.
of natural gas, particularly during the winter
season, liquefied gas is commonly used for
High input costs kept inflation in the
cooking by homes and restaurants. Since LPG
readymade food elevated
and LNG are mostly imported inputs, the
Increase in prices of edible oil, wheat, rice, movement in exchange rate and substantial
poultry, and meat, which are major components
42 Edible oil, including, constituted 1.4 percent and 1.9 percent of total urban and rural inflation, respectively. Especially, the share of
cooking oil and vegetable ghee accounted for 3.6 and 4.1 percent, respectively in urban and rural food inflation.
43 Ministry of Finance (2022-23). Pakistan Economic Survey. Islamabad: MoF.
44 Source: USDA, Foreign Agricultural Service, Pakistan: Food and Agricultural Import Regulations and Standards Country Report
65
Prices of Perishable Food Items Figure 3.29 Breakdown of Energy Inflation - Urban Figure 3.30
Fresh fruits Potatoes Fuel Solid fuel
Onions Tomatoes Liquefied hydrocarbons Gas
Fresh vegetables
Electricity Energy index - rhs
yoy growth in percent
500 yoy contribution in percent percent
60 60
400
50
300 40
40
200 30
20
100 20
10
0 0
-100 -10 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Sep-22
Jul-22
Oct-22
Nov-22
Feb-23
Aug-22
Dec-22
Mar-23
Jan-23
Apr-23
Jun-23
May-23
FY22 FY23
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics
increase in gas prices internationally during percent and 24.8 percent, respectively. Detailed
FY23 increased domestic prices of these items. data shows that the surge in energy inflation
was primarily contributed by motor fuel and
electricity charges, followed by gas (Figure
Floods also had a significant impact on the
3.30).46 In addition to elevated level of global
prices of perishable food items
prices of crude and LNG, the rise in energy
inflation also manifested the impact of perennial
The prices of perishable food items in urban area
structural issues in the energy sector that has led
rose by 41.8 percent during FY23, compared to
to accumulation of a huge circular debt stock. A
7.5 percent rise in FY22. This surge mainly came
significant part of increase in electricity tariffs is
from a steep increase in the prices of onions,
meant to stem the flow of circular debt.
particularly during Oct-Jan FY23 due to both
Likewise, to boost revenue collection, the
reduced cultivation area and extensive flood-
government re-imposed petroleum development
related damages in Sindh and Balochistan
levy (PDL) on transport fuels from July 2022.
(Figure 3.29).45
The contribution from motor fuels remained
To counter the shortages, onion imports that
consistently higher throughout the year on
increased to 617.1 million kg (US$ 176 million)
account of various factors. First, the
during Jul-Feb FY23, from 134.2 million kg (US$
international price of crude oil remained
22 million) in the same period last year helped to
elevated in the first half of FY23, before starting
ease onion prices from January 2023 onwards.
a downtrend in the second half (Figure 3.31).
Second, relatively weak currency outweighed
Energy inflation the gains from decline in international oil prices
(Figure 3.31). Third, the government allowed
Energy inflation spiked to 38.4 percent and 39.1 hikes in margins of dealers in August 2022, and
percent in urban and rural areas in FY23, twice of OMCs in December 2022 and January
accelerating from the previous year’s 25.3 2023, which further added momentum in fuel
45 The production of onions declined to around 1.7 thousand tonnes in FY23 from 2.1 million tonnes in last year. In addition, the
cultivation area of the crop also shrank to 128 thousand hectares in FY23 from 141 thousand hectares. Source: Pakistan Bureau of
Statistics
46 In case of rural areas, solid fuel had notable contribution to energy inflation, given its vast use during gas shortages in most of the
rural regions in the country.
66
Composition of Petrol Prices; Impact of International Crude Prices and PKR Depreciation Figure 3.31
Base price IFEM
Price differential claim OMC margin
Dealer margin PDL
GST Growth in international crude price- rhs
PKR-USD exchange rate depreciation- rhs Growth in domestic petrol price- rhs
Rupees per litre PDL reimposed & increased successively yoy growth in percent
300 150
250 125
200 100
150 75
100 50
50 25
0 0
-50 -25
-100 -50
Sep-21
Dec-21
Jun-22
Sep-22
Dec-22
Jun-23
Apr-22
Apr-23
Jan-22
Jan-23
Aug-21
Aug-22
Oct-21
Feb-22
Oct-22
Feb-23
Jul-21
Jul-22
Nov-21
Mar-22
May-22
Nov-22
Mar-23
May-23
Source: Oil and Gas Regulatory Authority
price increase.47 Fourth, in a bid to bolster non- 3.32). Source-wise power generation data shows
tax revenue, the government re-imposed PDL on that the cumulative gas and coal-based
transport fuels from July 2022. The levy on generation had a sizeable share in the overall
petrol and diesel was increased to Rs 50 per liter power generation (Figure 3.33a).51 Furnace oil
by November 2022 and April 2023, was also used in the fuel mix, particularly in the
respectively.48 last quarter of FY22, amidst its falling but still
elevated price (Figure 3.33b), which translated
Another major contributor to energy inflation into higher FCAs in FY23.
was electricity charges during FY23.49 Annual
rebasing, quarterly adjustments, and monthly However, with international energy prices
Fuel Charge Adjustments (FCAs) were imposed receding, and a relief package offered to
to align power tariffs with the cost recovery, so consumers in September 2022, FCAs turned
as to slow down buildup of circular debt. almost negligible as the year progressed. Also,
However, during FY23, these adjustments also with government having already introduced
carried the impact of delayed revisions for FY22 substantial annual and quarterly tariff
on account of annual rebasing and quarterly adjustments in Q1-FY23, contribution of
adjustments. A total annual rebasing of Rs 7.91 electricity charges to energy inflation remained
per KWh for FY22 and FY23 was introduced in muted in the second and third quarters of FY23.
three stages during Jul-Oct FY23. The quarterly
adjustments for FY22 started in June 2022, which Nonetheless, the last quarter witnessed a hike in
were followed by timely adjustments for the first contribution by electricity charges to energy
two quarters of FY23 (Table 3.9).50 inflation. The hike came in contrast to same
period last year, when government froze
FCAs augmented the electricity prices, electricity prices by providing subsidy to protect
especially in the first quarter of FY23 (Figure consumers from the sharp upsurge in
47 Average monthly dealer margins was increased from Rs 3.4 per liter in FY22 to Rs 4.4 per litre in FY23.
48 Average monthly PDL on petrol was up from Rs 5.5 per liter in FY22 to Rs 42.3 per liter in FY23. Similarly, average monthly levy
on diesel was Rs 3.9 per liter in FY22, which increased to Rs 30.1 per liter in FY23. Data sources: Oil & Gas Regulatory Authority &
Pakistan State Oil
49 Annual rebasing and quarterly adjustments are done on account of capacity charges, transmission charges and market operator
fee; variable operation & maintenance charges; and impact of transmission and distribution losses on FCA. Whereas, FCA is meant
to cover variable cost of fuels used to generate power. Source: NEPRA
50 Quarterly tariff adjustments usually apply for 2-4 months from the date of enforcement.
51 Between Q4-FY22 and Q4-FY23, the cumulative share of gas and coal-based generation stood at nearly half of the total.
67
Annual Rebasing and Quarterly Table 3.9 Fuel Charge Adjustment (FCA) Figure 3.32
Adjustments in Electricity Tariffs Rs per kwh
12
Aug-22
Cumulative Annual Rebasing for FY22 & FY23 Collected in FY23
Jul-22
Mar-22
Unit 9
Apr-22
Dec-21
Stage w.e.f
(Rs per KWh)
Jan-22
Sep-22
Jun-22
May-22
Feb-22
Nov-21
First stage 3.5 July 25th 2022 6
Oct-21
Jun-23
Sep-21
May-23
Nov-22
Second stage 3.5 August 1st 2022
Oct-22
Mar-23
Jan-23
Dec-22
Feb-23
Apr-23
3
Third stage 0.91 October 1st 2022
Total 7.91 0
Quarterly Tariff Adjustments
(for Residential Consumers) -3
Jul-21
Jul-22
Sep-21
Dec-21
Mar-22
Apr-22
Jan-22
Sep-22
Dec-22
Mar-23
Apr-23
Jan-23
Aug-21
Nov-21
May-22
Aug-22
Nov-22
Oct-21
Feb-22
Jun-22
Oct-22
Feb-23
Unit
Quarter w.e.f
(Rs per KWh)
Q1-FY22 0.57 June 1st 2022
Note: x-axis indicates months for which FCA was charged;
Q2-FY22 1.55 July 1st 2022 indicative months around the bars are months in which FCA
Q3-FY22 0.51 September 1st 2022 was actually billed. FCA is collected with a one-month lag.
Q4-FY22 1.49 to 3.21 October 1st 2022 Source: National Electric Power Regulatory Authority
Q1-FY23 1.49 to 3.21 February 1st 2023
Q2-FY23 0.5 April 1st 2023 (Table 3.10), which pushed up electricity prices
Note: 1) Quarterly adjustments usually apply for 2 to 4 in last quarter of FY23.
months from the date of enforcement; 2) Quarterly
adjustments for Q3 and Q4 of FY23 to be determined &
collected in FY24 Besides motor fuel and electricity, gas charges
Sources: IMF & NEPRA were increased in the second half of FY23
international energy prices in the wake of the (Figure 3.30).52 Two new slabs were added to
Russia-Ukraine conflict. Besides, the domestic sector consumption in the unprotected
government had deferred part of FCAs for the category. Depending on the slab, government
months of August and September 2022 to raised gas prices from 33.0 percent to 112.0
provide partial relief to consumers during percent, averaging 64 percent. 53 Besides, there
floods. The deferred FCAs were to be collected was also a hike of around 29 percent in gas
in 8 months – March 2023 to October 2023 prices for commercial and export-oriented
establishments (for gas used in captive power
generation).54
Power Generation by Source Figure 3.33a Price Trend of Fuels Used in Figure 3.33b
Power Generation
Hydel Coal RFO Gas RLNG Others Furnace oil - local Coal- local
100 shares in percent Coal- int'l Natural gas index- int'l
yoy growth in percent
80 400
60 300
200 FY23
40
100
20
0
0 -100
Nov-21
Nov-22
Jul-21
Jul-22
Sep-21
Mar-22
Jan-22
Sep-22
Mar-23
Jan-23
May-22
May-23
Sep-21
Nov-21
Sep-22
Nov-22
Jan-22
Jan-23
May-22
May-23
Mar-22
Mar-23
Jul-21
Jul-22
Source: National Electric Power Regulatory Authority Sources: Pakistan Bureau of Statistics and Haver Analytics
52 Source: OGRA notification dated February 15, 2023, effective from January 01, 2023
53 This information is calculated for comparable slabs in the new and previous notifications only. Source: OGRA
54 In absolute terms, commercial tariffs increased from Rs 1,283 to Rs 1,650 per MMBTU, and exported-oriented tariffs, from Rs 852
to Rs 1,100 per MMBTU. Source: OGRA
68
Recovery of Deferred FCAs from August-September Bills - XWDISCOs Table 3.10
Rupees per KWh
Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Total
Protected
2.00 2.00 1.50 0.95 0.89 1.00 1.00 1.00 10.34
(=<200 units)
Non-protected
2.75 2.75 2.25 0.95 0.79 1.50 1.75 1.50 14.24
(=<200 units)
Non-protected
2.75 2.75 2.25 0.95 0.79 1.50 1.75 1.50 14.24
(201-300 units)
Private Agricultural 3.00 2.00 0.50 0.50 0.50 0.90 1.50 1.00 9.90
Source: National Electric Power Regulatory Authority
Second round effects of multiple supply FY23.56 As shown in Figure 3.34b, increase in
shocks and elevated inflation expectations core inflation was quite broad-based. Top
drove core inflation contributors of NFNE inflation were house rent,
articles for personal care57, washing
Core inflation doubled in both the urban and soap/detergents, cotton cloth, transport services,
rural baskets in FY23 compared to the previous education, marriage hall charges, personal
year, reaching multi-years’ high of 16.2 and 20.6 effects58, and text books, among others (Figure
percent, respectively.55 Elevated prices of core 3.35).
goods mainly underpinned this increase,
followed by services and house rent. Quarterly The steady increase in core inflation was despite
data show that core inflation gathered pace as a notable slack in domestic demand during
the year progressed, both on year-on-year and FY23. The demand management measures
quarter-on-quarter basis (Figure 3.34a). introduced since the previous year, including a
Furthermore, core inflation in rural areas cumulative 1500 bps increase in the policy rate
remained higher than urban areas throughout since September 2021, flood-induced damages to
Quarterly Trend in NFNE Inflation Figure 3.34a NFNE Inflation Dispersion in FY23 Figure 3.34b
Urban Rural Sub-indices showing Inflation less than FY22
yoy growth in percent Sub-indices showing Inflation more than FY22
30
25 39 Rural
20 43 Urban
15
10
5
4
0
3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY21 FY22 FY23 Sources: Pakistan Buraeu of Statistics, and State Bank of
Source: Pakistan Bureau of Statistics Pakistan calculations
55 This is the highest level of core inflation recorded since FY16, when PBS first introduced separate inflation indices for urban and
rural areas.
56 Rural inflation exceeded urban inflation primarily because of different spending patterns of households in both baskets. For
example, rural households spend more on transport services and less on house rents than their urban counterparts. With transport
services inflation at record highs, it has hit rural areas harder than urban areas. Moreover, cost of transporting goods from urban
centers to rural areas has also gone up. This explains the relatively higher inflation in rural and urban areas for similar goods. For
instance: cotton cloth, drugs and medicines, text books, among others.
57 Articles for personal care include: soap, tooth paste/brush, hair color, hair removing cream, shaving cream and blade, disposable
razor, shampoo, lipstick, nail polish, perfume, face cream, talcum powder, hair oil, tissue paper (perfumed), and pampers
58 Personal effects include: gold 24 carat, silver 24 carat, wall clock, artificial jewelry, suitcases & trunks, ladies purse
69

Top Contributors to NFNE Inflation (Urban) in FY23 Figure 3.35
YoY growth in percent
Contribution to
wt. Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23
CPI Inflation
House rent 19.3 0.9 5.6 5.6 5.6 5.3 5.3 5.3 5.4 5.4 5.4 5.3 5.3 5.3
Top Contributors in Goods
Goods 18.2 4.9 16.5 20.5 21.9 22.9 23.1 23.9 25.2 28.7 33.2 35.7 37.1 34.6
Appliances/Articles/Products for personal
3.0 0.8 15.8 19.6 22.1 23.8 24.3 25.7 26.7 31.8 34.3 38.7 40.1 38.4
care
Washing soap/detergents/match box 1.4 0.7 24.7 28.9 37.7 41.5 43.4 46.6 47.0 51.6 57.2 60.4 63.7 62.0
Cotton cloth 2.2 0.6 18.1 23.5 23.7 24.2 22.2 21.4 20.7 18.8 32.7 31.5 31.5 28.4
Personal effects n.e.c. 0.9 0.4 18.2 21.2 22.8 19.2 19.3 24.9 32.6 38.6 36.8 44.8 53.3 45.5
Text books 0.7 0.3 8.7 20.0 17.2 20.6 20.5 59.2 71.3 74.1 74.0 106.8 114.0 114.0
Motor vehicles 0.8 0.3 24.0 38.4 34.9 34.3 28.2 27.5 28.0 38.8 45.5 41.5 38.0 36.6
Top Contributors in Services
Services 16.3 2.3 14.3 15.6 15.9 16.8 15.4 14.6 15.4 16.8 16.2 16.2 15.9 13.5
Transport services 1.7 0.5 39.7 44.6 42.4 41.3 33.4 28.4 30.0 33.1 30.6 28.8 24.1 12.5
Education 4.9 0.4 10.5 10.1 10.0 11.1 11.1 10.8 10.4 10.4 5.8 6.0 5.7 5.9
Marriage hall charges 1.8 0.4 21.7 24.2 24.3 24.5 18.8 17.0 19.9 25.5 32.3 32.9 33.4 25.3
Personal grooming services 0.8 0.2 18.2 20.6 27.5 30.8 29.5 29.1 31.7 31.1 31.0 31.9 37.5 34.7
Tailoring 1.1 0.2 12.4 17.1 17.4 17.8 17.6 17.4 18.7 23.6 24.3 21.2 19.7 19.0
Household servant 0.8 0.1 13.3 14.3 15.1 20.1 20.6 20.5 19.5 17.2 18.4 18.7 18.5 17.1
NFNE Inflation 53.7 8.2 12.0 13.8 14.4 14.9 14.6 14.7 15.4 17.1 18.6 19.5 20.0 18.5
Note: 1) This heat map is extracted from one drawn for all 47 sub-indices of core inflation, which are sorted by contribution to growth in overall inflation in FY23 in the
descending order. 2) Red= highest, Green= lowest
economic activities, and squeezed real incomes thrice the average 7.6 percent increase observed
of households, have considerably slowed during previous five-year.59 The federal and
domestic demand during FY23. provincial governments also raised minimum
wages, which partly contributed in wage
Growth in households’ real final consumption inflation in FY23.60
expenditure is estimated to have decelerated
significantly to 1.7 percent during FY23, from 6.8 In addition, supply shortages of non-essential
percent last year (Figure 3.36). Similarly, the imported goods as well as PKR depreciation
domestic sales of various high frequency added to price pressures by increasing the cost
demand indicators slumped during the year of imported raw materials and intermediate
(Figure 3.37). goods for manufacturing (Figure 3.38b), while
outweighing the impact of softening global
The surge in core inflation, notwithstanding the commodity prices, and anemic import demand
visible contraction in domestic demand, largely (Chapter 6 – External). Furthermore, revenue
reflects the pass- through of exchange rate mobilization measures introduced in February
depreciation and the second round effects of 2023 through the Finance (Supplementary) Act
energy and food prices that spilled over to 2023, including increase in GST rate from 17
broader prices and wages (Figure 3.38a). High percent to 18 percent, and advance tax of 10
food and energy inflation dampened real percent on functions and gatherings arranged in
incomes of labor, which pushed wage inflation marriage halls, marquees, hotels, restaurants, or
during the year. Escalating sharply in FY23, any other place used for such purpose also
low-end wages rose by 21.2 percent, about fueled price increase of goods and services.
59 Low-end wages include charges/wages for tailoring, household servant, cleaning and laundering, construction worker, garbage
collection, dental services, doctor fee, mechanical services, and personal grooming services.
60 The federal government had increased the minimum wage rate from Rs 17,500 to Rs 20,000 in FY22. In FY23, the provinces raised
the minimum wage rates to Rs 25,000 per month. Source: Employers Federation of Pakistan (www.efp.org.pk/minimum-
notifications/page/2/)
70
Slowdown in Demand Side Indicators Figure 3.37

Households Final Consumption Figure 3.36
Expenditure FY22 FY23
growth in percent growth in percent
70
9.5
35
6.9 7.2 6.8
5.6 0
-35
1.7 -70
generation
PoL sales
Auto sales
dispatches
net local sales*

Selected NFCs
Cement
Power
-2.9
FY17
FY18
FY19
FY20
FY21
FY22
FY23
*Jul-Mar, NFC stands for Non-financial companies
Sources: SBP Quarterly Financial Statements Analysis
Source: Pakistan Bureau of Statistics Mar-2023, NEPRA, APCMA, OGRA, PAMA
Lastly, increasing inflation expectations current and expected course of food and non-
reinforced the uptrend in underlying energy prices, employment level and interest
inflationary pressures, as consumers and firms rates also weigh on consumers’ inflation
incorporated these into wages and prices (Figure expectations.61 Global commodity price outlook,
3.38c). Literature suggests that consumers’ and monetary policy decisions and exchange rate
businesses’ inflation expectations mainly track movements are other factors that influence
the trend in energy inflation. In addition, the consumers’ inflation expectations.
Interaction of Energy Figure 3.38a Interaction of Exchange Figure 3.38b CPI Inflation Influenced Figure 3.38c
Inflation with NFNE Inflation Rate with NFNE Inflation by Consumer Inflation Expectations
30 25 40
NFNE inflation (urban)
NFNE inflation (urban)
35
CPI inflation
20
30
20
15 25
20
10 15
10
10
5
5
0 0 0
0 50 100 -50 -30 -10 50 70 90
Consumer inflation expectations index
Energy inflation (urban) PKR-USD exchange rate Data used here ranges from Jul-2017 to
Note: YoY growth for monthly data Note: YoY growth for monthly data Jun-2023, corresponding to months in
during Jul 2021-Jun 2023 during Jul 2021-Jun 2023 which Consumer Confidence Surveys
were conducted
Sources: Pakistan Bureau of Statistics and State Bank of Pakistan
61H. Abbas, S. Beg, and M. A. Choudhary (2015). “Inflation Expectations and Economic Perceptions in a Developing Country
Setting”, available at: (www.sbp.org.pk/ccs/paper.pdf) (ii) R. Moessner (2022). “Determinants of Inflation Expectations in the Euro
Area”, Intereconomics: Review of European Economic Policy, 57(2), 99-102. (iii) M. D. Patra, and P Ray (2010). “Inflation
Expectations and Monetary Policy in India: An Empirical Exploration”, International Monetary Fund.
71

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3 Monetary Policy and Inflation

3.1 Policy Review Inflation Projections Figure 3.1

Frequency Distribution of Changes in Prices of CPI Items Figure 3.2

Sources: Pakistan Bureau of Statistics, and State Bank of Pakistan calculations

becoming entrenched. In a bid to anchor account outlooks appeared to have contained on

chain disruptions, weakened economic activity

Headline Inflation Figure 3.5a Core Inflation Figure 3.5b

Source: Haver Analytics

Source: OECD, Haver Analytics

Outlook April 2023

Global Commodity Price Indices Figure 3.6

a) All commodities b) Crude oil c) Natural gas

180 300 160

* The dotted lines represent FY17-FY19 average

Monetary AggregatesP Table 3.1

* Others include: trusts and non-resident deposits

deposits grew by 15.9 percent in FY23, flows in billion Rupees

encouraged by favorable returns on deposits FY22 FY23

Government Borrowings from the Figure 3.11

amount on net of maturity basis via conventional instruments.

Auction Summary Table 3.3

Auction Summary of T-Bills Figure 3.12

Liquidity Indicators, FY23 Figure 3.14

3.4 Credit to Private Sector 650

pace of economic activity contained the credit

50 LSM 11.7 -10.3

PoL sales 14.4 -26.5

Loans to Private Sector Businesses Table 3.6

the discontinuation of Regionally Competitive

18 Source: APTMA press release dated July 21, 2022, (www.aptma.org.pk/wp-content/uploads/2023/08/16.-21st-July-2022.pdf)

Source: State Bank of Pakistan

Slowdown in construction activities led to The fixed investment loans decelerated to Rs

20 Source: Pakistan Stock Exchange, also available at: www.dps.psx.com.pk/download/document/207869.pdf

dropped by 38.4 percent during the year.

Gross Disbursements under Figure 3.22

Source: State Bank of Pakistan Source: State Bank of Pakistan

Automobile Loans Figure 3.23

year (Figure 3.23). Besides higher interest rates, 3.5 Inflation

Average CPI Inflation and Contribution Table 3.8

Composition of CPI Inflation Figure 3.24

*Inclusive of alcohol beverages and readymade food

Box 3.1: Challenges in Controlling Food Inflation in Pakistan

practices through transfer of knowledge.

State Bank of Pakistan Annual Report 2022-23

International Food Policy Research Institute, Discussion Paper, 01516.

State Bank of Pakistan Annual Report 2022-23

www.pda.com.pk/2021/02/19/letter-to-the-pm/ accessed on August 11, 2023.

State Bank of Pakistan Annual Report 2022-23

rural regions in the country.

State Bank of Pakistan Annual Report 2022-23

to Rs 1,100 per MMBTU. Source: OGRA

State Bank of Pakistan Annual Report 2022-23

Slowdown in Demand Side Indicators Figure 3.37

net local sales*

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