The State Bank of Pakistan (SBP), on Friday, emphasized the role of fiscal policy and effective administration for price and financial stability, particularly rationalization of government spending, increasing revenue collection, strengthening food and energy supply chains, and enhancing productivity. The central bank, in its Governor’s Annual Report (GAR) for the fiscal year 2022-23 issued here, also vowed to continue taking decisions to prevent high inflation from becoming entrenched and keep inflation expectations anchored to achieve the medium-term target of 5-7 % by the end of FY25, with FY24 inflation moderating to 20 – 22 per cent on account of the impact of contractionary monetary policy, improvements in domestic supplies, softer non-energy global commodity prices, and the high base effect. However, the report added, “This outlook hinges on the absence of adverse shocks stemming from geopolitical tensions, unforeseen climate events, and unfavourable movements in global commodity prices.” The GAR 2022-23 is published Under Section 39 (1) of the State Bank of Pakistan Act, 1956, which requires the governor to submit to the Parliament an annual report regarding the bank’s objectives, the conduct of monetary policy, the state of the economy and the financial system. The GAR stated that fiscal year 2023 was extraordinarily challenging, with a host of external and domestic shocks, amplified by lingering structural weaknesses, contributing to persistently high inflation amid a contraction in economic activities. The 2023 witnessed the wide-ranging reverberating impact of the devastating monsoon floods. In contrast, elevated global commodity prices, less-than-envisioned fiscal consolidation, and the delay in the 9th review of IMF’s Extended Fund Facility (EFF) program added pressures on the external account; it conveyed. The report noted that the average headline National Consumer Price Index inflation surged to 29.2 per cent in FY23, but it was in line with multi-decade-high inflation in most advanced and emerging economies that maintained an aggressive monetary policy stance. Elevated global commodity prices, pressure on external accounts, and ensuing exchange rate depreciation contributed to inflationary pressures amid uncertainty over the completion of the 9th review of the IMF’s EFF program, inadequate external inflows and continued scheduled debt repayments, the GAR outlined. This was in addition to the pass-through of costlier fuel and food prices, exchange rate depreciation, increases in energy prices and indirect taxes, high inflationary expectations, and ensuing wage growth. The report also noted that political uncertainty weighed on business and consumer sentiments and, thus, on economic activity. Real GDP contracted by 0.2 per cent, and budgetary targets for the government’s fiscal and primary balances were missed by large margins amid less-than-planned tax revenues and lower-than-budgeted reduction in subsidies. The report noted that the SBP responded to these challenges by maintaining a contractionary policy stance, raising the policy rate by a cumulative 825 basis points during FY23, in addition to the 675 basis points increase in FY22. SBP had taken a host of measures to contain domestic demand and imports in the wake of growing pressures on PKR and the general prices, GAR FY23 said, adding that while some of these measures were difficult given their implications on economic activity in the short term, they were necessary to meet external debt obligations as per schedule and contain more significant risks to macroeconomic stability over the medium time. Regarding the SBP’s objective of maintaining the financial system’s stability, the report emphasized that the country’s financial sector grew steadily and continued to meet the economy’s credit and financial needs. Total assets of the banking sector grew by 17 per cent in FY23. At the same time, the report said that Islamic Banking Institutions (IBIs) performed well during the review period and outperformed their conventional counterparts on several fronts, such as financing and investments, along with double-digit growth in deposit mobilization. In addition to fostering economic development and better utilization of resources, the central bank’s measures and initiatives towards its tertiary objective of supporting the government’s economic policies also contribute to primary and secondary objectives, given its foundational impact on monetary and financial systems in the medium to long term, the report said. In particular, the report highlights the SBP’s continued focus on implementing the National Financial Inclusion Strategy and the Banking on Equality policy to expand digital financial services and reduce gender disparities in financial inclusion. Additionally, the report said that the SBP is facilitating the digitization of financial services through digital banks and innovative financial products and systems with comprehensive guidelines on EMIs and cloud service providers.