Pakistan’s central bank raised its benchmark interest rate to a record 21% as price gains soar and the nation teeters on the brink of a default as the International Monetary Fund’s bailout hangs.
(Bloomberg) — Pakistan’s central bank raised its benchmark interest rate to a record 21% as price gains soar and the nation teeters on the brink of a default as the International Monetary Fund’s bailout hangs.
The State Bank of Pakistan’s monetary policy committee increased the target rate by 100 basis points from 20%. The move was seen by 6 of 37 economists in a Bloomberg survey, with three predicting a hold and the rest expecting a hike of 150-300 basis points. The key rate is at the highest since central bank data going back to 1956.
“Today’s decision as an important step towards anchoring inflation expectations around the medium-term target” the central bank said in a statement Tuesday, adding that the current monetary policy stance is appropriate. In the near term, inflation is expected to stay high, it said. The financial sector “remains broadly resilient, while economic activity continues to moderate,” SBP said.
The rate hike comes as inflation quickened by a fresh record in March months after authorities raised taxes and energy prices and allowed the currency to depreciate to meet IMF conditions and revive a $6.5 billion program. Funds from the multilateral lender are crucial to avert a default and prop up an economy beset by supply shortages.
“The overall balance of payments position continues to remain under stress, with foreign exchange reserves still at low levels,” according to the central bank. It said “significant progress” has been made in completing the review of IMF’s loan program which is “critical to rebuild the FX reserve buffers.” Tighter global financial conditions “have added to the difficulties” of Pakistan to access international capital markets, SBP said.
What Bloomberg Economics Says…
We think that rates have reached the peak after Tuesday’s hike. Our base case remains that the country will likely secure IMF aid as it has fulfilled most of the loan conditions. If the IMF chooses not to resume loans, the rupee would sink and inflation would soar. The central bank would then need to raise rates further to support the currency and contain inflation.
—Ankur Shukla, economist
For the full note, click here
Pakistan’s foreign exchange reserves rose to $4.24 billion as of March 24, but still covers only about one month of imports. Last month, China rolled over about $2 billion in loans providing some relief to the nation.
The South Asian nation has settled bulk of the foreign debt payments for the current fiscal year ending June, Governor Jameel Ahmad said in its analyst briefing. Pakistan needs to pay $2.2 billion of overseas debt, while $2.3 billion will be rolled-over in the final quarter, said Ahmad.
IMF has asked Pakistan to seek commitments for new loans from Saudi Arabia and the United Arab Emirates before it revives the loan program. The nation has missed multiple deadlines to resume the bailout, raising concerns that it may have to pause debt repayments. The South Asian nation needs to repay about $3 billion of debt by June.
Tuesday’s rate increase along with previous tightening will help SBP achieve the medium-term price target over the next eight quarters. However, “uncertainties attached with the global financial conditions as well as the domestic political situation, pose risks to this assessment,” the central bank said.
–With assistance from Tomoko Sato, Ismail Dilawar, Devidutta Tripathy, Pradeep Kurup and Khalid Qayum.
(Updates with more details)
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