KARACHI: After the complete surrender by the PMLN-led coalition government to meeting the IMF conditions for the revival of the programme, the financial market looks firm that the State Bank of Pakistan (SBP) would increase the interest rate in the range of 150 to 200 basis points in the next monetary policy to be announced on Monday.

State Minister for Finance Aisha Ghouse Pasha said on Thursday that the government was ready to implement all conditions to bail out the economy with IMF help.

Bankers, financial experts and analysts expect a hike in the SBP’s policy rate keeping in view the surging inflation which hit 24.5 per cent in December 2022, but they are not sure about the size.

The IMF conditions include a market-based exchange rate, an increase in electricity and gas prices and the imposition of new taxes to generate sufficient liquidity to compensate for the first quarter fiscal slippages.

After the implementation of IMF conditions, the state minister warned that things would change and it would not be business as usual. Some analysts said this is a clear indication that the SBP policy rate would be increased to get some control over inflation, but at the same time, the IMF conditions would generate much more inflation with electricity and gas price hikes.

However, the current economic situation has created serious confusion among the stakeholders, particularly in the absence of any solution. A researcher said the country would default with or without IMF since the remedy being asked is short-term and the term may expire within three to six months.

“If the SBP adopts a cautious approach and lifts the rate by 50 to 100bps, it would have to jack up the lending cost by another 100bps within a month since the IMF conditions are prone to accelerate interest rates,” he observed.

Samiullah Tariq, head of research at Pak-Kuwait Investment and Development, said that he expects an increase of 150bps to counter inflation and external pressure.

A survey conducted by Topline Research showed that the market expects an increase of 100 to 200 basis points in the interest rate. The majority of participants expect (74pc) a 100-200bps hike, 37pc think it would be 100bps, 18pc see 150bps and 19pc put it at 200bps.

On the external front, challenges continue to mount as SBP’s foreign exchange reserves dropped by $3bn to $4.56bn since the last monetary policy announcement on Nov 25, 2022. This is due to huge debt repayments and a slowdown in inflows.

“We think that the policy rate will increase by 100bps however if the inflation rate does not fall and external issues persist, further rate hikes cannot be ruled out,” said Topline Research.

The high-interest rate has already crippled domestic investments and economic growth could fall even less than 2pc in FY23 compared to 6pc in FY22.

Tahir Abbas, head of research at Arif Habib Ltd, said he expected the SBP to raise the interest rate by 100bps with the rising inflation amid fiscal adjustments before the resumption of the IMF programme. Fears about economic instability are growing since Saudi Arabia has also indicated no further monetary assistance free of cost.

On Jan 14, Saudi Arabia’s Finance Minister Mohammad Al-Jaddan said the kingdom is changing the way it assists allies, shifting from previously giving direct grants and deposits unconditionally.

“We used to give direct grants and deposits without strings attached and we are changing that. We are working with multilateral institutions to actually say we need to see reforms,” the Saudi minister said.

Published in Dawn, January 22nd, 2023