Islamabad : Pakistan’s central bank raised its benchmark interest rate on Monday by 150 basis points to 13.75%, the second hike in less than two months, as the South Asian nation grapples with a sinking economy. The key interest rates have been hiked by 400 bps in less than two months, according to the central bank. This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability, the State Bank of Pakistan (SBP) said in a statement. The country is going through economic turmoil, including high inflation, reserves declining to as low as less than two months’ of imports and a fast-weakening currency.Uncertainty over the revival of an International Monetary Fund programme has compounded volatility in the economy and markets amid a political crisis since a new government took over last month from ousted Prime Minister Imran Khan. The IMF is likely to conclude ongoing talks over a 7th review in Doha. If talks succeed, Pakistan will get a $900 million tranche of the $6 billion rescue package agreed in 2019. Pakistan’s Finance Minister Miftah Ismail is in Doha, where he is likely to discuss whether to withdraw unfunded subsidies in the oil and power sectors as agreed last month with the IMF. Khan announced the subsidies in his last weeks in power and they will cost around $2 billion from April to June before Pakistan presents its annual budget.
The central bank said its monetary policy committee’s baseline outlook assumed continued engagement with the IMF and the reversal of the fuel and electricity subsidies. Under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year, the bank said. The IMF has delayed issuance of money several times over fiscal policy concerns. The central bank emphasized the urgency of fiscal consolidation to complement the monetary tightening, adding: This would help alleviate pressures on inflation, market rates and the external account.
It said government spending in the fiscal year starting in July was expected to be expansionary, led by higher subsidies, grants and provincial development expenditures. At 0.7 percent of GDP, the primary deficit during the first three quarters of the year compares unfavourably with the primary surplus of 0.8 percent of GDP during the same period last year, it said. Continued IMF support will ensure that Pakistan’s external financing needs during fiscal 2023 are more than fully met as well, it said. As a result, the bank said excessive pressure on the Pakistani rupee should ease and the bank’s foreign reserves resume their upward trajectory during the course of the next fiscal year.