Govt agrees to increase interest rate by 200bps

Accepts another pre-condition of IMF to unlock $1.1b funding

ISLAMABAD:

Pakistan has accepted another pre-condition of the International Monetary Fund (IMF) for the release of $1.1 billion critical funding – a part of $6.5 billion bailout package – as the government agreed to increase the policy (interest) rate which stands at 17% by two per cent or 200 basis point.

The increase is based on rates the government set in the auction to raise domestic debt. This will push the interest rate to 19%, just below the previous record of 19.5% set in October 1996.

Sources in the Ministry of Finance maintained that a technical level discussion had virtually taken place between Islamabad and the IMF review mission. They said that there was expectation that Islamabad would increase the interest rate by two per cent.

It was noted said that most of the pre-conditions of the global money lender’s had been fulfilled.

Sources said that discussion on some issues of the power sector was in the final stage after which the staff-level agreement with the IMF would be reached.

It was further learnt that Pakistan had given a detailed briefing to the IMF officials on the sources of foreign exchange till June.

Earlier this month, the relevant Pakistani officials and the IMF staff concluded the ninth review of the $6.5 billion bailout package without a staff-level agreement. However, both sides agreed to a set of measures that could still help clinch the deal.

The Pakistani authorities had hoped that they would convince the IMF about implementing the conditions in a gradual manner but the hopes were dashed during the 10-day visit by the IMF mission.

Pakistan agreed to implement the Memorandum of Economic and Financial Policies (MEFP), which contained policy suggestions by IMF. Officials still hoped that the staff-level agreement could be reached soon.

There was a broad consensus with regard to leaving the rupee value to be determined by the market forces, lifting of the restrictions on the imports and allowing the already imported goods to be cleared.

Also the power tariff was to be increased and new taxes imposed to pave the way for the deal. However, because of a severity of the economic crisis, every agreed measure would be tough on an overwhelming majority of the Pakistani people.