KARACHI: In a surprise move on Monday, the State Bank of Pakistan (SBP) increased the benchmark interest rate by 100 basis points as the country looks forward to the completion of the ongoing International Monetary Fund (IMF) programme.

The decision by the SBP’s Monetary Policy Committee (MPC) marks a cha­nge in its monetary policy stance within a couple of weeks. In the preceding mee­ting held on June 12, the MPC was of the opinion that the economy was unable to bear the burden of another interest rate hike. Thus, it kept at the time the interest rate unchanged at 21pc.

While most financial sector experts believe the SBP’s latest action fulfils another demand by the IMF, the central bank also hinted at the same in the monetary policy announcement.

After an emergency meeting, the MPC announced an increase in the policy rate by one percentage point to 22 per cent, effective June 27.

‘Unscheduled’ increase fulfils yet another IMF condition for loan programme revival, analysts say

The committee said it has noted two important domestic developments since the last meeting (June 12) that have slightly deteriorated the inflation outlook and can potentially increase pressure on the already stressed external account.

First, there are certain upward revisions in taxes, duties and the petroleum development levy (PDL) rate in the 2023-24 budget as approved by the National Assembly on June 25. Second, the SBP withdrew on June 23 its general guidance for commercial banks on the prioritisation of imports.

“While the MPC views these measures as necessary in the context of completion of the ongoing IMF programme, they have increased the upside risks to the inflation outlook,” said the SBP.

“Everyone’s holding their breath for an IMF deal, and this unscheduled interest rate hike seems to be a step towards fulfilling yet another condition. An IMF deal at this time will be a huge confidence booster for Pakistan as it will catalyse other inflows from multilateral sources, including the World Bank and Islamic Development Bank,” said Komal Mansoor, head of research at Tresmark, a terminal for capital markets data.

Two days ago, Finance Minister Ishaq Dar said at the National Assembly that Pakistan agreed to Rs215 billion taxes after three-day parleys with IMF officials to complete the ninth review under the Extended Fund Facility, which is pending due to the country’s external financing gap.

“The MPC views this action as necessary to keep the real interest rate firmly in the positive territory on a forward-looking basis. This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5-7pc by the end of 2024-25, barring any unforeseen developments,” said the SBP.

In the statement issued after the MPC meeting on June 12, the committee viewed the then monetary policy stance as appropriate to achieve the objective of price stability “barring any unexpected domestic and external shocks”. The MPC further noted that the outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities”.

The MPC said that the June 26 decision would help in addressing external sector vulnerabilities and reduce economic uncertainty along with the expected completion of the ongoing IMF programme and the government adhering to the target of generating a primary surplus in 2023-24.

“The committee reiterated that it would continue to carefully monitor evolving economic developments and stands ready, if necessary, to take appropriate action to achieve the objective of price stability over the medium term,” said the SBP.

Published in Dawn, June 27th, 2023

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