The State Bank of Pakistan (SBP), less than a month after the last meeting of its Monetary Policy Committee (MPC), on Monday announced it is increasing the benchmark interest rate by 100 basis points—from 21 to 22%–with analysts claiming it is aimed at reviving the stalled International Monetary Fund (IMF) program.
In a statement issued after its previous meeting, the MPC had said it believed the interest rate should be maintained at 21 percent to anchor inflation expectations and facilitate economic growth. It had also said no further alterations were merited, barring “unexpected domestic and external shocks,” adding the outlook was “contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”
The statement issued after Monday’s “emergency” meeting of the MPC, however, noted “two important domestic developments” over the past month, stating they had slightly deteriorated inflation outlook with risks of increased pressure on the already-stressed external account. The first, it said, was upward revisions in taxes, duties and the Petroleum Development Levy (PDL) in the finance bill for fiscal year 2023-24 passed by the National Assembly. The second was the withdrawal of all import restrictions.
“While the MPC views these measures as necessary in the context of completion of the ongoing IMF program, they have increased the upside risks to the inflation outlook,” it said, suggesting the primary aim of the current increase is to facilitate the revival of the stalled $6.5 billion IMF program. Clarifying that the MPC felt the additional tax measures would likely boost inflation, both directly and indirectly, it said easing import restrictions could also exert pressures in the foreign exchange market. “The latter may result in higher-than-earlier anticipated exchange rate pass-through to domestic prices,” it warned.
Claiming that the interest rate hike was “necessary to keep real interest rate firmly in the positive territory on a forward-looking basis,” it said this would also help anchor inflation expectations with an eventual goal to steer it down towards the medium-term target of 5-7% by the end of FY25.
“The MPC views that today’s decision—along with the expected completion of the ongoing IMF program and the government adhering to the target of generating a primary surplus in FY24, would help in addressing external sector vulnerabilities and reduce economic uncertainty,” it said, adding that it would continue to carefully monitor evolving economic developments and take appropriate action to achieve the objective of price stability over the medium-term.