KIBOR rate hits 13-year high

Experts claim rise comes in anticipation of a further spike in inflation reading

Salman Siddiqui April 27, 2022
Debt servicing cost may further increase due to anticipated increase in interest rate. photo: file


The commercial banks’ benchmark lending rate Kibor hit a 13-year high at 14.10% on Tuesday, in anticipation of a further spike in inflation reading, as the new PML-N coalition government is considering withdrawing subsidies on energy products to win back the International Monetary Fund (IMF) loan programme.

The six-month Kibor (Karachi inter-bank offered rate) cumulatively increased by 264 basis points (bps) since January 1, 2022 to date. It soared 641 bps since the start of the current fiscal year on July 1, 2021, Arif Habib Limited (AHL) reported while citing the central bank’s data.

“The six-month Kibor reached … the highest level since February 19, 2009 (14.18%).”

Talking to The Express Tribune, AHL Economist Sana Tawfik projected, “The inflation reading may increase to 13-14% in three to four months following the government withdrawal of subsidies on petroleum products and electricity sales to end-consumer.”

The inflation reading was recorded at 12.7% in March. “It is most likely to remain around this level in April as well, subject to no increase in energy prices till the end of the month,” she said.

The government is most likely to remove subsidies on the energy products in phases to pass on the surge in international oil prices to local consumers. Accordingly, the inflation would go up in a phased manner.

In anticipation of this, the domestic financial market has factored-in the likely surge in inflation reading into its benchmark lending rate Kibor, she said.

Commercial banks’ lending rates usually remain higher than the prevailing or projected inflation reading in the country.

The inflation reading is most likely to rise to 13-14% during each of the four months from May to August 2022. “The reading may also remain high in double digits in the months due to higher base effect as well,” she said.

Earlier this month, the Oil and Gas Regulatory Authority (Ogra) proposed to increase petrol and diesel prices by Rs83.50 per litre and Rs119.88 per litre, respectively, to pass on the surge in international oil prices and charge petroleum levy at Rs30 and 17% GST per litre.

Prior to this, the ousted PTI government reduced the petroleum products prices by Rs10 per litre on February 28 and fixed petrol rate at Rs149.86 per litre and diesel at Rs144.15 till June 30, 2022. Besides, it reduced the power tariff by Rs5 per unit. The prices have remained unchanged to date since then.

The IMF has conditioned the resumption of its enhanced bailout package of $8 billion with the reversal of subsidies and collection of increased taxes on energy products. The IMF delegation is scheduled to visit Pakistan in May 2022.

Tawfik said that the central bank, if needed, may consider further increasing its benchmark interest rate to counter inflation reading at its scheduled meeting on May 23 and July 7.

The interest rate remains a tool available to the central bank to control inflation.

The bank aggressively increased the rate by 250 bps to two-year high of 12.25% in an emergency meeting held earlier in the outgoing month of April. It increased the rate on the backdrop of the then aggressive surge in international oil prices to around $120 a barrel amid the Russia-Ukraine war. The prices hover slightly over $100 per barrel on Tuesday.

The central bank would keep its monetary policy in line with the government’s fiscal policy. “If the government will opt to tighten fiscal policy to win back the IMF loan programme, the central bank may also further tighten its monetary policy through further hike in the key policy rate,” she said.

Published in The Express Tribune, April 27th, 2022.

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