KARACHI: Speculations on Thursday gripped the entire financial sector, currency markets, and trade and industry after the International Monetary Fund’s approval of $6.68 billion loan on Wednesday. However, there is a general consensus among analysts that the State Bank of Pakistan would leave its policy rate unchanged in its upcoming monetary policy review.
The much-awaited deal failed to rescue the rupee as the dollar further rose to Rs104.82 in the inter-bank market on Thursday, reflecting that uncertainty persisted in the exchange rate regime.
While traders had reservations about a possible hike in interest rate, analysts were cautious over the small first tranche.
It was expected that the first tranche of the IMF loan would be of about $2bn which would support Pakistan’s critically falling foreign exchange reserves. But a payment of $540 million shows the IMF wants to keep close watch over the progress on prescriptions suggested for the economy.
Analysts in their reports issued on Thursday believed that the Fund has provided a space for monetary policy to continue with the current interest rate policy.
The State Bank, which was to announce Monetary Policy in the second or third week of August, had put off the policy for Sept 13. The postponement gave a sense that the central bank was awaiting the results of the government-IMF negotiations.
Zeeshan Afzal of Topline Securities said, “We believed that government would increase 50 basis points in the upcoming monetary policy because of IMF pressure, though inflation does not warrant any hike. However, statements and intentions from both sides now show that SBP may not raise rates immediately.”
Analysts and trade and industry have been supporting a low interest policy to promote investment that may accelerate economic growth. The Federation of Pakistan Chambers Commerce and Industry has already cautioned that any increase in the interest rate could be “disastrous for the economy”.
Nauman Khan of Shajar Capital said, “We think the central bank is likely to continue with an accommodating monetary policy stance. The focus of the policymakers would once again be on promoting investment and highlights increased chances of maintaining status quo in the upcoming MPS.”
While the currency dealers in the inter-bank market said the demand pressure was high, the open market dealers said the rupee-dollar parity would stable at this stage.
“I believe rupee will not gain despite agreements with the IMF. It may become stable at this point since the demand would remain high while the inter-bank market is still bullish,” said Anwar Jamal, currency expert and dealer in the open market. Other aspect of the IMF agreement was also analysed by researchers who warn about possible consequences.
“We see the decision to keep initial disbursement low as a signal of the IMF’s intent of compelling the government to take on-board politically tough decisions (such as weeding out power subsidies, broadening the tax base and restructuring public-sector entities,” said a JS Research report.