KARACHI: Fulfilling another demand of the International Monetary Fund (IMF) to revive its loan programme, Pakistan’s central bank jacked up its key policy rate by 100 basis points to a new record high at 22 per cent in an emergency meeting on Monday. The rate would become effective from Tuesday.
The State Bank of Pakistan (SBP) said the increase in the rate was inevitable considering the outlook for inflation was deteriorating. The country has recorded six-decade-high inflation reading at 38 per cent in May 2023.
The bank said on its official Twitter handle, “MPC (monetary policy committee) of SBP convened an emergency meeting today, where it noted that potential upside risks to the inflation outlook have increased from the last meeting (June 12, 2023), and accordingly decided to raise the policy rate by 100bps to 22%.”
“MPC views that these risks are mainly coming from the implementation of new measures in the fiscal and external sectors, which are important in the context of completion of the ongoing IMF programme.”
The MPC noted that today’s action is necessary to keep the real interest rate firmly in positive territory on a forward-looking basis that would help in bringing down inflation towards the medium-term target of 5 – 7 per cent by the end of FY25.
In the statement after its meeting held on June 12, 2023, the MPC viewed the then monetary policy stance as appropriate to achieve the objective of price stability “barring any unexpected domestic and external shocks.”
The MPC further noted that, this outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”
The committee, however, has 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.
First, there are certain upward revisions in taxes,duties and PDL (petroleum development levy) rate in FY24 budget as approved by the National Assembly on June 25.
Second, the SBP, on June 23, withdrew its general guidance for commercial banks on prioritisation of imports, meaning all imports have been fully reopened with immediate effect.
“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 SBP monetary policy statement reads.
The development comes as Pakistan looks to revive the $6.5 billion loan IMF programme, which is a must to boost foreign exchange reserves and avert the imminent default on foreign debt repayments.
Earlier, the global money lender presented three conditions for resuming its $6.7 billion loan programme for Pakistan including a reforms-based budget, fixing functioning at domestic currency markets and arranging gap financing of $6 billion from friendly countries.
Hope for IMF revival also strengthened after the central bank lifted the ban on all imports immediately. This move was also in line with the lender’s recommendations.
Pakistan’s foreign exchange reserves are currently at a critical low of $3.5 billion. This has partially closed imports and impacted factories and also jacked up the risk of default.
Pakistan has to repay $23 billion in foreign debt next fiscal year starting July 1, 2023. The government has improved its functioning on currency markets as well.
Yesterday, the National Assembly passed the Finance Bill 2023-24 with certain amendments to the proposed budgetary measures with a revised outlay of Rs14.48 trillion.
The budget was approved a day after Finance Minister Ishaq Dar announced fiscal adjustments worth Rs300 billion, including fiscal tightening measures as demanded by IMF in a final push to clinch a much-delayed rescue package.
The new measures announced by Dar, while winding up the budget debate included increasing the tax burden on the salaried class and withdrawing the $100,000 asset-whitening scheme, suggesting that the government accepted the majority of the IMF demands.