Pakistan increased its benchmark interest rate to 17%, the highest in more than 24 years, as the economy grapples with raging inflation, supply shortages, dwindling currency reserves and stalled foreign financing.
(Bloomberg) — Pakistan increased its benchmark interest rate to 17%, the highest in more than 24 years, as the economy grapples with raging inflation, supply shortages, dwindling currency reserves and stalled foreign financing.
State Bank of Pakistan’s monetary policy committee raised the target rate by 100 basis points from 16%, a move expected by 25 of 43 economists in a Bloomberg survey. The majority of the economists had forecast a hike ranging from 75-200 basis points, while four predicted a hold.
“The inflation pressure persists and on this basis the MPC emphasized to control inflationary pressures,” central bank Governor Jameel Ahmad said in a press conference Monday. The government’s 2% economic growth estimate this year may see pressure, he said.
The embattled South Asian nation is reeling from the aftermath of catastrophic flooding last year that amplified the impact of political turmoil and a financial crunch. With foreign currency reserves at a nine-year low and funding including from the International Monetary Fund held up, Pakistan was forced to restrict import payments.
On the bright side, Pakistan is “expecting progress in the talks with the IMF soon” and dollar inflows will come once that’s completed, according to the governor, who made similar remarks last week about incoming funds from the Middle East. Other officials have also made those assurances in the past but the money has yet to materialize.
Pakistan has repaid $15 billion of the $23 billion in loans due in the financial year ending June, the governor said at the briefing. Of the remaining $8 billion, $3 billion will be rolled over, he said.
Pakistan’s FX reserves were at $4.6 billion as of Jan. 13, equivalent to less than a month of imports.
At the same time, about 6,000 containers of food items, raw materials and medical equipment are stranded in ports, aggravating inflation that has lingered above 20% since June. Prices of chicken, eggs and flour in the country continue to rise even as global commodity costs have moderated.
As the government curtailed overseas purchases, local banks have been refusing to issue letters of credit, leading to a standstill that puts businesses at risk of shutting down.
Inflation may accelerate to 26.6% this month due to supply disruptions, according to Fahad Rauf, head of research at Ismail Iqbal Securities Pvt. That would put price gains near a four-decade high of 27.25% seen in August, higher than the central bank’s inflation forecast of 21%-23% that was revised upwards in November.
Pakistan’s “core inflation is still rising consistently for the last 10 months and we are having major challenges on the external side,” said Ahmad. “In the given situation we want to keep the signals right. We don’t want to give any signal to the market that everything is alright and we are holding rates at current level or thinking of reversal.”
The central bank raised the target rate by a total of 625 basis points in 2022.
“Near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit,” SBP said in a statement. Slowing global demand could affect exports and remittances, it added.
A further increase in energy prices loom as part of the IMF’s conditions for the loan. A widespread power outage on Monday after a grid failure is the latest blow to Pakistan.
–With assistance from Tomoko Sato, Khalid Qayum and Devidutta Tripathy.
(Updates with comment from governor in eleventh paragraph.)
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