KARACHI, Nov 11: The State Bank of Pakistan is expected to increase interest rate by 2 per cent as part of a 3.5 per cent hike to be enforced in two phases to meet one of the conditions to secure a bailout package from the International Monetary Fund.

Dr Mirza Ikhtiar Baig, Adviser to the Government on Textiles, told Dawn on Tuesday: “The IMF was insisting on a 5 per cent increase in interest rate (discount rate), but we successfully negotiated to restrict it to 3.5 per cent.”

He said a 1.5 per cent increase would be made in January.

The SBP has confirmed that a meeting of its board of directors had been convened.

Earlier, members of the Federation of Chambers of Commerce and Industries and Karachi Chamber of Commerce and Industry held a meeting with presidents of banks and senior officials of the central bank, including SBP Governor Dr Shamshad Akhtar. The industry would have to face the devastating impact of 3.5 per cent increase in interest rate, said Dr Baig, who is also an industrialist and exporter.

The government is to reach an agreement with the IMF, but it is gradually taking steps to please the lender which is known for putting the economy of the recipients in reverse gear by forcing them to reduce development expenditures and increase taxes.

As a first step, subsidies on petroleum products were withdrawn and talks were held with the IMF in Dubai.

Dr Baig said that the State Bank officials and other top bankers had agreed to restructure the Karachi Inter-Bank Offered Rate (Kibor) because it was being manipulated.

“Kibor rate is 13 per cent while the market rate was 15.76 per cent on Tuesday which is a manipulation,” he said. Kibor is a benchmark rate for banks to get credit from other banks.

The banks are charging higher rate in the wake of discount rate of 13 per cent, main inflation of 25 per cent and increasing risk due to meltdown of global financial system.

“Banks are charging an average rate of about 18 per cent from the industry,” he said.

With the increase of 3.5 per cent in discount rate, banks will be compelled to raise lending rates by at least 5 per cent, which would be disastrous for the economy.

Some big banks are offering 16 per cent return on deposits, which means they will lend money at 25 per cent to keep themselves in profit.

During the meeting, exporters asked the central bank to extend more incentives by offering 100 per cent Export Refinance Part-II.

Under the EFP-II, exporters were getting bulk of cheap money, but the SBP stopped it due to massive misuse of this facility. However, it promised to consider the request for EFP-II.

The SBP governor nominated Dr Baig on a committee to finalise recommendations for EFP-II.