Pakistan’s central bank left interest rates unchanged to stop growth from weakening and rein in inflation as the cash-strapped nation and the International Monetary Fund remain deadlocked over bailout loans.
(Bloomberg) — Pakistan’s central bank left interest rates unchanged to stop growth from weakening and rein in inflation as the cash-strapped nation and the International Monetary Fund remain deadlocked over bailout loans.
The State Bank of Pakistan’s monetary policy committee decided to keep the target rate at a record 21%, a move expected by a majority of the 44 economists surveyed by Bloomberg. Seven forecast a hike of a 100 basis points and one saw a 200 basis points jump.
“The MPC views the current monetary policy stance, with positive real interest rates on forward looking basis, as appropriate to anchor inflation expectations,” the central bank said in a statement on its website on Monday, adding that the outlook was contingent on addressing the prevailing domestic uncertainty and external vulnerabilities.
The policy makers hiked the discount rate by 600 basis points in the last four meetings as part of efforts to help the government unlock a long-delayed IMF loan program. Price gains rose by a record 38% last month as a result and along with supply constraints, the country retained the crown of Asia’s fastest inflation.
The central bank said reduced demand-side pressures and easing inflation expectations, along with moderating global commodity prices and high base effect, would help in taming prices further. It sees inflation to start falling from June onwards.
Pakistan is racing to secure IMF loans to avoid a default. It faces about $22 billion of external debt payments for fiscal year 2024, which begins next month, according to Columbia Threadneedle Investments, which is about five times its reserves.
Pakistan’s central bank ruled out that the government is looking to change payment terms with its bilateral creditors after Finance Minister Ishaq Dar said the nation will change some terms in its payments to bilateral creditors.
“Maybe the words used by finance minister on restructuring…maybe they interpreted them differently but as far as the government plans and State Bank plans as of today, we don’t plan to enter into any kind of debt restructuring,” Governor Jameel Ahmad said in an analyst briefing. “We will continue to meet all our obligations on time.”
Pakistan has paid about $400 million and needs to pay $900 million in the remaining month of June, according to Ahmad. Another $2.3 billion is expected to be rolled over.
Domestic demand is expected to remain subdued amid tight monetary stance, economic uncertainty and continuing stress on external account, the central bank said. “Debt repayments amid lower fresh disbursements and weak investment inflows continue to exert pressure on the FX reserves,” it said.
While the South Asian nation significantly raised energy prices and taxes to meet the IMF demands, there have been other hurdles to cross. The Washington-based lender wants Pakistan to bridge the external financial gap of $2 billion and create a market-driven exchange rate — demands the government is struggling to meet.
READ: Pakistan Set for Bilateral Debt Talks Amid IMF Uncertainty
The rate decision comes after Pakistan’s government laid out a growth target of 3.5% for the next fiscal year in a budget presentation, which is the same as the IMF’s forecast. It’s a lofty goal given the steep currency depreciation, climate change-driven floods and import curbs are expected to cut growth by 0.3% in the current year to end-June.
Pakistan’s economic growth slowed sharply to 0.29% for the fiscal year ending June, one of the lowest levels in its history.
–With assistance from Tomoko Sato.
(Updates with governor’s comments)
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