SBP increases policy rate to 17pc to ‘anchor inflation’

Published January 23, 2023
<p>State Bank of Pakistan Governor Jameel Ahmad addresses a press conference on Wednesday. — DawnNewsTV</p>

State Bank of Pakistan Governor Jameel Ahmad addresses a press conference on Wednesday. — DawnNewsTV

State Bank of Pakistan (SBP) Governor Jameel Ahmad announced on Monday that the Monetary Policy Committee (MPC) had decided to increase the interest rate by one per cent to 17pc.

He made the announcement in a press conference following the MPC’s meeting. The increase was largely in line with market expectations.

Separately, a press release issued by the central bank stated, “The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer-than-anticipated period. The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.”

The MPC noted three major economic developments since its last meeting in November — inflation continued to remain elevated, with core inflation showing an upward trend over the last 10 months; near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit and there has been a continuous drawdown in foreign exchange reserves; and global economic and financial conditions broadly remain uncertain in the near-to-short term, leading to mixed implications for Pakistan’s economy.

“On balance, the committee reiterated its November 2022 assessment that the short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched. The MPC also emphasised on the engagements with the multilateral and bilateral partners to overcome domestic uncertainty and to address the near-term external sector challenges,” the press release added.

C/A deficit

In his press conference, the SBP chief noted the central bank had previously predicted that the current account deficit would clock in at $10 billion this year. “Our actual performance during the first six months is better than expected. Despite a slowdown in exports and remittances, our current account deficit during July-Dec stood at $3.7bn.

“This means we are within our target. We now predict that we may be able to bring down the current account deficit below $9bn.” Terming it a good development, Ahmad said it would reduce the country’s external financing requirements to an extent.

Funding gap

The SBP governor also gave a breakdown of the country’s financing requirements. He recalled that in a Dec 8 podcast, he had said financing requirements for FY23 stood at $33bn. Of these, the current account deficit stood at $10bn, followed by loan repayments, both bilateral and multilateral, at $23bn.

“Of the $23bn loan repayments, we have already paid back $15bn. We have repaid huge loans from January to July, of which $9bn have been paid and $6bn have been rolled over. These rollovers are already confirmed.

“We have to repay $8bn in the remaining five months of the current fiscal year. Of this, we have an understanding of $3bn being rolled over under a bilateral facility with a country. We expect a bilateral commercial loan of $2.2bn to go from our accounts and be returned,” he said without elaborating.

This left $3bn to be repaid over the next five months, Ahmad said. “This is the debt analysis. Our net outflow will be less than $3bn. We have paid $1.8bn in interest already and will pay a little over $1.1bn in the remaining five months which will become a part of the current account deficit.”

Exchange rate

Responding to a question, the SBP governor iterated the exchange rate was market-based and fluctuations happened within market parameters. The pressure on the rate was below normal due to administrative measures to curb imports, he added.

Besides this, there was also an element of speculation, Ahmad said. “Our external financing requirements are high and there is a gap between inflows and outflows. Speculators try to encash that difference, because of which the rate is higher in the curb market.

“When our IMF review is completed and inflows are received, market sentiment will improve and the gap in different rates [being offered in the interbank and open markets] will end. This is a temporary phenomenon,” he stressed.

In response to another question, he revealed that certain banks had accrued profits of Rs100bn from January to September 2022 through speculation about the exchange rate.

The SBP had initiated an inquiry against 13 banks and identified issues and underlying factors, he said. Both regulatory and fiscal action could be taken against the banks involved in speculation, he said, adding that consultation on the action to be taken was ongoing and would be concluded soon.

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