Borrowing costs hovering at two-decade highs to quell Asia’s fastest inflation rates will be in focus Friday in Sri Lanka after Pakistan raised the policy rate to the highest in 25 years, with both economies looking to win bailouts from the International Monetary Fund.
(Bloomberg) — Borrowing costs hovering at two-decade highs to quell Asia’s fastest inflation rates will be in focus Friday in Sri Lanka after Pakistan raised the policy rate to the highest in 25 years, with both economies looking to win bailouts from the International Monetary Fund.
The Central Bank of Sri Lanka will probably keep the standing lending facility rate at 15.5% for a fifth straight meeting, according to all eight economists in a Bloomberg survey ahead of the decision around 4:30 p.m. in Colombo. The benchmark rate is at the highest since 2001, according to official data.
In Pakistan where price pressures are still on the boil, the central bank on Thursday increased the target rate by 300 basis points to 20%, the most since at least June 1997, based on compiled data. Most analysts expected a 200-basis-point hike.
Price pressures have somewhat eased in Sri Lanka after peaking at nearly 70% last year, moderating to 50.6% in February from a year earlier, whereas price gains quickened to 31.55% last month in Pakistan, the most since the 1960s. Inflation was forecast by the State Bank of Pakistan to keep on surging in the next few months, with the average now seen at a range of 27%-29% by the end of the fiscal year in June from a previous estimate of 21%-23%.
The International Monetary Fund’s bailout — $2.9 billion for Sri Lanka and $6.5 billion for Pakistan — if approved will unlock more funding, boost foreign-currency reserves that can pay for less than a month of imports, and arrest a deepening turmoil.
There are $7 billion of repayments in the coming months for Pakistan, including a Chinese loan of $2 billion due in March, according to Fitch Ratings. The nation needs to repay about $3 billion while $4 billion in dues is expected to be rolled-over until June, SBP Governor Jameel Ahmad said Thursday, adding that Pakistan remains “committed to make all debt payments.”
The IMF loan will help address near-term challenges, SBP said. But those bailouts have strings attached, such as ensuring sustainable revenue and enabling market-determined exchange rates that have led to a spate of energy price increases, tax hikes and depreciation in currencies — all of which tend to spur inflation.
“Both Pakistan and Sri Lanka are well behind the inflation curve,” Hasnain Malik, a strategist at Tellimer in Dubai said before the rate decisions. “More rate increases and more fiscal cuts are ahead, which means further pain for the economy is in store.”
Bailout programs of the two countries have been pending for months, and in the case of Pakistan, for years.
Pakistan secured a $1.1 billion IMF loan in August, which was part of a $6.5 billion package approved in 2019. Disagreements over spending plans after last year’s devastating floods and government’s failure to meet loan conditions stalled the program. Reviving the bailout became crucial as the nation teetered on the brink of a default.
What Bloomberg Economics Says…
Pakistan is at serious risk of default. The International Monetary Fund has been dragging its feet on aid for months. And even if the IMF finally comes through, the debt won’t be sustainable unless creditors agree to large write-downs. China, Pakistan’s largest external lender, might have to accept a haircut of as much as $8 billion, by our calculations. That is high unlikely – and shows just how dire the situation is.
—Ankur Shukla and Abhishek Gupta, India economists
For the full note, click here
An IMF review last month ended without a deal for Pakistan. Finance Minister Ishaq Dar, in a Twitter post on Thursday reiterated that talks with the IMF are about to conclude and that a staff-level agreement with the Fund is expected next week. Foreign currency reserves climbed to $3.81 billion as of Feb. 24, after a $700 million commercial loan from China, SBP said Thursday.
In the case of Sri Lanka, an IMF staff-level pact for a $2.9 billion loan program was secured at the start of September, with the board originally anticipated to approve the funds by the end of 2022. Authorities have since adjusted expectations to within this quarter.
The main reason for the delay is the absence of a formal assurance from China, also Sri Lanka’s biggest bilateral creditor, that it would support a debt restructuring for the bankrupt island nation.
While crippling supply shortages in Sri Lanka have eased, foreign currency reserves have been inching up and inflation slowing, the nation needs the IMF bailout to get more funding and turn the corner.
“Just getting into a program is not enough,” said Dhananath Fernando, the head of a Colombo-based economic think tank Advocata Institute. “Sri Lanka can also fall back like Pakistan. It has to bring long term stability and do the reforms.
–With assistance from Asantha Sirimanne, Tomoko Sato, Karthikeyan Sundaram and Ruchi Bhatia.
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