Tweeting conditions: IMF asks Pakistan to jack up interest rates

Authorities locked in negotiations for third review, policy talks to begin next week.

ISLAMABAD:

In an anticipated move, the International Monetary Fund (IMF) has asked Pakistan to increase interest rates after the inflation inched up to 9.2% in April on a year-on-year basis, hitting a point from where it had started receding seven months ago.

The bad news for Pakistan is that the Consumer Price Index inflation in April increased to 9.2% from 8.5% in March, according to a tweet by IMF_Pakistan, an account being managed by the Resident Representative Office of the IMF.

Bad news on inflation: CPI inflation in April 2014 increased to 9.2% from 8.5% in March. http://t.co/5aKYapVzi6

— IMF Pakistan (@imf_pakistan) May 3, 2014

The IMF has aired its views at a time when the Fund and Pakistani authorities are locked into negotiations in Dubai for the third review of a $6.7-billion programme. Any decision on increasing the interest rates will be taken during policy level talks that will begin next week. At present both the sides are engaged in technical level talks, meant to exchange data with each other.

The policy level talks will be attended by Finance Minister Ishaq Dar and newly appointed Governor State Bank of Pakistan Ashraf Mahmood Wathra.

The decision to go public on the issue by the IMF may bring the government under pressure, particularly at a time when the authorities are discussing such issues behind closed doors.

The IMF said that the trimmed core inflation also increased to 9% year-on-year in April from 8.1% in March. “The SBP monetary policy needs to respond,” according to the IMF.

Trimmed core inflation also increased to 9.0% yoy from 8.1% in March 2014. SBP monetary policy needs to respond.

— IMF Pakistan (@imf_pakistan) May 3, 2014

The trimmed core inflation is a measure used to identify trend in inflation by eliminating items from the index showing sudden changes.

The core inflation, measured by excluding energy and food items, also increased to 8.5% in April as compared to 7.6% in March, according to the Pakistan Bureau of Statistics –the national data collecting agency.

The overall energy prices were going down and the inflationary pressure was coming from the core side, strengthening the case of the IMF for an increase in interest rates.

The IMF’s demand to increase the interest rate has come ahead of new monetary policy that the State Bank of Pakistan (SBP) is expected to announce by mid of this month. The demand is contrary to the hopes given by Deputy Governor SBP Saeed Ahmad, who had said that last month that the industrialists would soon hear good news on the interest rate.

In its last announcement on monetary policy, the SBP had kept the rate unchanged at 10%.

As CPI-based inflation has gone up to 9.2%, the real interest rate – the difference between the monetary policy rate and inflation, has come down to just 0.8%. The real interest rate is an important factor that foreign investors consider before taking any decision on investing in a country.

Sources said the IMF is demanding a minimum 100 basis points or 1% increase in interest rates, as it considers half a percentage point increase in the interest rates ineffective in controlling inflation. The ministry of finance would try to downplay the increase by terming it a seasonal phenomenon, they added.

It is yet to be seen whether the government will accept the IMF’s view point, as it has so far shown the tendency to appease the industrialists.

Published in The Express Tribune, May 4^th, 2014.

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