• 100 bps hike takes benchmark rate to 25-year high of 17pc
• SBP chief says less than $3bn debt repayments left over next five months

KARACHI: The State Bank of Pakistan (SBP) on Monday raised its key interest rate by 100 basis points to a 25-year high of 17 per cent in an attempt to tame persistently high inflation, stressing that achieving price stability was crucial for attaining sustainable economic growth in the future.

Announcing the central bank’s monetary policy, SBP Governor Jam­eel Ahmad also told a news co­n­ference that the country nee­d­ed only less than $3 billion for debt servicing in the remaining five months of the current fiscal year.

The increase of 100 bps in the country’s benchmark rate was in line with the expectations of most economists and market watchers, according to a Reuters survey.

The SBP has now raised the policy rate by 725 bps since January 2022, and the current rate of 17pc is the highest since October 1997.

The government is under pressure amid persistently high inflation and a sharp fall in reserves, among other factors. Annual consumer inflation has remained above 20pc since June and was recorded at 24.5pc for December. SBP’s reserves have plummeted from $17.6bn in January 2022 to $4.6bn now, barely enough to cover three weeks of imports.

According to a statement released after the news conference, the central bank’s Monetary Policy Committee viewed that anchoring inflation expectations was important to achieve the medium-term inflation target of 5pc to 7pc by December 2024 and required coordinated monetary and fiscal policy efforts.

“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 bank said. “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.”

It said that although some moderation was seen in inflation in November and December, inflation remained high and core inflation had been on a rising trend for the last 10 months.

The lack of fresh financial inflows and ongoing debt repayments have led to a steady drawdown in official reserves, the central bank said, adding that the MPC also noted that the country’s current fiscal stance was inconsistent with monetary tightening.

“Thus, given the evolving macroeconomic challenges, it is important for fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth,” it said.

Current account deficit

In his news conference, the SBP chief noted the central bank had previously predicted that the current account deficit would clock in at $10bn 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-December stood at $3.7bn,” he said.

“This means we are within our target. We now predict that we may be able to bring down the current account deficit below $9bn.”

Describing it as a good development, Mr Ahmad said it would reduce the country’s external financing requirements to an extent.

Funding gap

Giving a breakdown of the country’s financing requirements, Mr Ahmad recalled that in a Dec 8 podcast, he had said financing requirements for the 2022-23 fiscal year 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, he 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 insisted that 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, there was also an element of speculation, he said, adding: “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.”

He said that when the country’s IMF review was completed and inflows were received, the market sentiment would improve and the gap in different rates being offered in the interbank and open markets would 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.

Published in Dawn, January 24th, 2023

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