KARACHI – Pakistan’s central bank on Monday raised its benchmark interest rate by 150 basis points to 13.75%, the second increase in less than two months as the South Asian country struggles with a sinking economy.
According to the central bank, the key interest rate has been raised to 400 bps in less than two months.
The State Bank of Pakistan (SBP) said in a statement that the move, along with much-needed monetary consolidation, would help keep medium-term demand more sustainable, including keeping inflation expectations at bay and risking external stability.
The country is going through an economic crisis with high inflation, low reserves, less than two months of imports and a rapidly weakening currency.
Uncertainty over the resumption of the International Monetary Fund (IMF) program has fueled economic and market instability amid a political crisis since a new government took office from ousted Prime Minister Imran Khan last month.
The IMF will probably end the ongoing discussions on the 7th review in Doha. If the talks succeed, Pakistan will receive 900 900 million of the agreed $ 6 billion rescue package in 2019.
Pakistan’s finance minister, Miftah Ismail, is in Doha to discuss whether to withdraw unsubsidized subsidies in the oil and power sector, which he agreed with the IMF last month.
Khan announced the subsidy in the last weeks of his tenure and will spend about $ 2 billion from April to June before presenting Pakistan’s annual budget.
The central bank has said that the monetary policy committee’s baseline approach captures continued engagement with the IMF and the return of energy and electricity subsidies.
“Under these estimates, headline inflation may rise temporarily and remain high throughout the next fiscal year,” the bank said.
The IMF has repeatedly delayed payments due to monetary policy concerns.
The central bank stressed the need for fiscal consolidation to complement fiscal consolidation, adding: “This will help reduce inflation, market rates and pressure on external accounts.”
It said government spending is expected to expand in fiscal years beginning in July, led by higher subsidies, grants and provincial development spending.
“At 0.7 per cent of GDP, the initial deficit in the first three quarters of the year adversely compares with the initial surplus of 0.8 per cent of GDP in the same period last year,” it says.
Continued IMF support will ensure that Pakistan’s external financing needs are more than fully met in 2023, it said.
As a result, the bank said that excessive pressure on the Pakistani rupee should be eased and the bank’s foreign reserves would resume their upward trajectory during the next financial year. (Additional reporting and writing by Asif Shahzad and Gibran Peshimum; Editing by Edmund Blair, Philip Fletcher and Hugh Lawson)