Pakistan’s central bank unexpectedly raised its benchmark rate to a record high in an emergency meeting as the nation makes a final attempt to revive its loan program with the International Monetary Fund.
(Bloomberg) — Pakistan’s central bank unexpectedly raised its benchmark rate to a record high in an emergency meeting as the nation makes a final attempt to revive its loan program with the International Monetary Fund.
The State Bank of Pakistan’s monetary policy committee decided to raise rates by 100 basis points to 22%, it said in a statement in Karachi on Monday. The decision has been taken after inflationary risks emerged from the recently announced budget and decision to lift restrictions on imports, said the statement.
“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,” it said in a statement.
The South Asian nation is going through its worst economic crisis amid record inflation and interest rates but it has seen prospects for its IMF loan take a positive turn before it expires at the end of the week. In a dramatic final attempt to appease the lender, the nation agreed to raise taxes by $750 million and cut spending in its annual budget over the weekend.
Pakistan’s dollar bonds rose and local stocks rallied on optimism the nation is going to secure its loan program. The nation has seen its loan program stall for more than half a year amid prolonged negotiations over issues such as the financing gap and taxes.
Read More: Pakistan Moves Closer to Vital IMF Deal With Last-Ditch Steps
“The decision will help in securing the IMF aid and reduce the strain on scant reserves by curbing demand,” said Ankur Shukla, an economist at Bloomberg Economics. The rate hike would likely hurt growth, but avoiding the default is a bigger priority for Pakistan right now, he added.
Pakistan faces about $23 billion of external debt service for the fiscal year 2024, which begins in July, more than five times the nation’s reserves.
Pakistan could default without an IMF loan given its very weak reserves, Moody’s Investors Service warned this month. Pakistan is the last of three South Asian countries to clinch IMF funding due to delays in delivering reforms and getting creditors to agree amid the political crisis.
The rate move, the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in fiscal year starting July would help in addressing external-sector vulnerabilities and reduce economic uncertainty, the central bank said.
Pakistan’s consumer prices rose to a record 37.97% in May, the highest in Asia. The authorities have hiked energy prices and allowed its currency to weaken this year to meet the IMF’s prescriptions. The relaxation in imports may exert pressures in the foreign exchange market, said the statement.
The committee views the rate hike as necessary to keep real interest rates in positive territory going forward, the central bank said on its website Monday.
“In the broader scheme of things this looks like one of the requirements from the IMF,” said Tahir Abbas, head of research at Karachi-based Arif Habib Ltd., from Karachi. “If you looks at the way things have unfolded in last few days and seeing all these measures Pakistan has taken, there is a high probability for the IMF agreement to happen now.”
–With assistance from Khalid Qayum and Ismail Dilawar.
(Updates with analyst comment in sixth paragraph)
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