Prudent monetary and fiscal policies, supported by the IMF’s Extended Fund Facility program, helped the economy move progressively along the stabilization path during the first eight months of FY20. The economy also saw a notable, smooth transition to a market-based exchange rate system, which was pivotal to addressing the external imbalances and rebuilding the foreign exchange reserves buffer. This structural adjustment, along with the government’s adherence to its commitment of zero SBP borrowing, improved overall monetary management and functioning of financial markets. A significant contraction in the twin deficits was visible from the start of the year. However, as the exchange rate was made more flexible and utility prices and taxes adjusted to rein in the fiscal deficit, inflationary pressures rose temporarily. Overall, the improving macroeconomic fundamentals helped restore consumer and business confidence, which set the stage for a recovery in the real sector.

At the time the Covid-19 infections began to increase, the country had already made noticeable gains on the macroeconomic stability front.

The SBP arranged multiple emergency meetings of the Monetary Policy Committee (MPC) to take frequent stock of the fast-evolving situation and decide accordingly. The MPC cut the policy rate by 625 bps in a roughly 3-month time period, which not only favorably repriced most of the existing loans by the private sector, but also made borrowing viable for firms that would otherwise have been priced out due to high interest rates and weakened profitability.