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KARACHI: Pakistan’s central bank raised its key policy rate by 300 basis points to a 26-year high of 20% on Thursday, fulfilling another IMF condition for the loan program’s revival.
The increase is 100 basis points higher than the 200-basis point consensus in the financial markets.
Previously, the IMF had asked the government to raise the interest rate in order to restart the much-needed $6.5 billion loan programme, which is critical for increasing foreign exchange reserves and avoiding a default on foreign debt repayments.
The State Bank of Pakistan (SBP) announced in its monetary policy statement on Thursday that it has revised its inflation forecast for the current fiscal year to 27 to 29 percent, up from 21 to 23 percent in November 2022.
The committee highlighted near-term risks to the inflation outlook from external and fiscal adjustments at its most recent meeting in January. The majority of these risks have materialized and are partially reflected in February’s inflation figures.
“National CPI inflation has risen to 31.5 percent year on year in February 2023, while core inflation has risen to 17.1 percent in the urban basket and 21.5 percent in the rural basket,” it said.
The MPC (monetary policy committee) noted today’s meeting that recent fiscal adjustments and exchange rate depreciation have resulted in a significant deterioration in the near-term inflation outlook and a further upward drift in inflation expectations, as reflected in the most recent wave of surveys.
The committee expects inflation to rise further in the coming months as the impact of these adjustments plays out before it begins to fall, albeit gradually.
“This year’s average inflation is now expected to be in the range of 27 to 29 percent, compared to the November 2022 projection of 21 to 23 percent.”
The MPC emphasized the importance of anchoring inflation expectations in this situation and the need for a robust policy response. The MPC stated that while the current account deficit (CAD) has significantly decreased, vulnerabilities still exist on the external side.
The CAD dropped to $242 million in January 2023, which was its lowest amount since March 2021.
Compared to the same period last year, the CAD is down 67% overall, totaling $3.8 billion in Jul-Jan FY23.
Despite the recovery, scheduled debt repayments and a decrease in financial inflows amid rising international interest rates and local concerns continue to put pressure on foreign exchange reserves and the exchange rate.
The MPC stated that while foreign exchange reserves are still low, concerted efforts are required to strengthen the external position. In this context, the outcome of the ongoing 9th review conducted by the IMF’s EFF will assist in resolving immediate issues in the external sector.
The MPC also emphasized the pressing necessity for energy conservation measures to relieve strain on the external account and fulfill other sectors’ import demands.
