Interest rates jacked up to 25-year high at 17%

100 basis point increase aims at containing high inflation

Salman Siddiqui January 23, 2023


In line with market expectations, the State Bank of Pakistan on Saturday jacked up key policy rate by 100 basis points to over 25-year high at 17% to ensure high inflation does not get entrenched.

The announcement came as the government had invited the International Monetary Fund (IMF) to sit on the negotiation table to sort out all ‘thorny’ issues, including implementing a market-based exchange rate and power tariff hike, in an effort to resume the ninth review of $7 billion Extended Fund Facility. The pricing adjustments would bound to cause high inflation.

"The uncertainty on the future path and expected near-term (pricing) adjustments remain the major upside risks to the inflation outlook," said SBP Governor Jameel Ahmad while addressing a news conference after chairing the monetary policy committee (MPC) meeting.

Financial experts anticipate inflation may spike to around 30% in the comng months after the IMF programme is implemented in February 2023.

Inflation reading hit 49-year high of 27.3% in August 2022. It recorded at 24.5% in December 2022, and is expected to rise back to 27% in January 2023.

The SBP governor once again reiterated the county would not default on international payments. "We will make all repayments on time. We have all the required financial arrangements in place."

He said the country is required to repay only $2.8 billion in foreign debt in the remaining five months of the current fiscal year ending June 30.

He, however, said the central bank has revised down its projection for the economic growth to less than 2% for the current fiscal year compared to its previous estimate of 2% for the year.

Earlier, it had projected the growth in the range between 3% and 4% before the epic floods hit the economy hard in August-September 2022.

He said foreign currency inflows on account of foreign direct investment (FDI), export earnings, and workers' remittances sent home by overseas Pakistan would remain low in the remaining five months of FY23.

"Near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit. The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves," he said.

"The expected slowdown in the global demand could negatively impact the outlook of exports and workers’ remittances for emerging economies, including Pakistan," he said.

He said the central bank has completed its investigation against 13 commercial banks which were found involved in undervaluing the rupee against the US dollar during January-September 2022.

The central bank is all set to take "fiscal or regulatory" action against those banks in "days."

The governor said Pakistan has remained engaged with the International Monetary Fund (IMF) to revive the loan programme. “The ministry of financing is taking lead on this front.”

"The monetary policy committee views that the completion of the pending 9th review under the IMF’s EFF (extended fund facility) is critical for reducing uncertainty and unlocking multilateral and bilateral inflows."

The governor said the inflationary pressures were persisting and continue to be broad-based. If these remain unchecked, they could feed into "higher inflation expectations over a longer than anticipated period…it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future".


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