By Staff Reporter
KARACHI: The State Bank of Pakistan (SBP) unexpectedly raised its benchmark rate by 100 basis points to a record high of 22 percent in an emergency meeting on Monday, apparently in a final attempt to revive a stalled loan program with the International Monetary Fund (IMF).
The MPC (monetary policy committee) decided to raise the policy rate by 100 bps to 22 percent, effective 27th June 2023,” the central bank said in a statement.
The central bank said the decision has been taken after anticipated inflationary pressure that will come from the recently announced budget and decision to lift restrictions on imports and the move was “necessary to keep real interest rates firmly in positive territory and anchor inflation expectations”.
“This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5 – 7 percent by the end of FY25, barring any unforeseen developments.”
The SBP said the decision was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.” This includes the completion of the ongoing IMF program and the government adhering to its target of generating a primary surplus in fiscal year 2024.
“The MPC views today’s decision, along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24, would help in addressing external sector vulnerabilities and reduce economic uncertainty,” the SBP said.
“While the MPC views these measures as necessary in the context of completion of the ongoing IMF program, they have increased the upside risks to the inflation outlook.”
The bank said its monetary policy committee had noted “two important domestic developments since the last meeting that have slightly deteriorated inflation outlook and which could potentially increase pressure on the already stressed external account.”
These developments were certain upward revisions in taxes, duties and the petroleum levy rate in the recently approved budget for fiscal 2023-24, and the central bank withdrawing on June 23 its general guidance for commercial banks on prioritisation of imports.
“While the MPC views these measures as necessary in the context of completion of the ongoing IMF programme, they have increased the upside risks to the inflation outlook,” the bank said.
The committee sees additional taxes as contributing directly and indirectly to inflation, while the lifting of its guidance on imports may exert pressures in the foreign exchange market resulting in “higher-than-earlier anticipated exchange rate pass-through to domestic prices”.
Analysts said Monday’s decision was in line with the demands of the International Monetary Fund to secure a stalled tranche of $1.1 billion from the current bailout package, which expires on June 30.
Fahad Rauf, head of research at Ismail Iqbal Securities, a Karachi-based brokerage firm, said the move appeared to be focused on securing the IMF’s support for the country.
“This seems to be another IMF condition. Higher rates would increase debt servicing burden on both government and private sector, but if this leads to IMF program, the positives would outweigh the negative implications, considering fragile macroeconomic conditions,” he said.
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