SBP likely to hike policy rate by 200bps

Calls MPC meeting 14 days ahead of schedule to appease IMF

KARACHI:

The State Bank of Pakistan (SBP) has preponed its Monetary Policy Committee’s (MPC) meeting to Thursday to consider hiking its key policy rate by an estimated 200 basis points on the recommendation of the International Monetary Fund (IMF).

Currently, the policy rate stands at 17% – a 25-year high. The central bank said on its Twitter handle, “The forthcoming meeting of the MPC has been preponed and will now be held on Thursday, March 02, 2023.”

As per its original calendar, the MPC meeting was scheduled to be held on March 16, 2023. The bank revised the meeting schedule in order to fulfil another IMF condition. The Fund has advised the central bank to increase its key policy rate by 200-300 basis points to win back its $6.5 billion loan programme.

As Pakistan struggles against time to revive the IMF programme, any further delay in the acquisition of the programme may trigger a sovereign default.

Meanwhile, Moody’s Investors Service on Tuesday downgraded Pakistan’s local and foreign credit ratings to Caa3, suggesting the risk of default has peaked with little chances of recovery. It noted the country’s balance of payment situation stands fragile with foreign exchange reserves currently standing at around $4 billion – crucial import cover of less than one month.

Financial experts, however, anticipated a maximum rise of 200 basis points in the policy rate considering a similar jump was taken by commercial banks. Last week, commercial banks raised their interest rate on financing to the government by 200 basis points. The banks charged the government a 26-year high interest rate at 20% on new financing of Rs258 billion for up to one year.

The said banks jacked their interest rates on speculations that the SBP would hike its key policy rate to achieve staff level agreement with the IMF.

Prime Minister Shehbaz Sharif, however, clarified last week that it may take another eight to ten days to strike staff level agreement after which the IMF executive board will take an additional few weeks to approve the release of the next loan tranche of $1.1 billion.

The government has taken a number of tough decisions to revive the IMF programme in order to avert a likely default on foreign debt repayments.

Published in The Express Tribune, March 1^st, 2023.

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