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Key takeaways from SBP’s off-cycle MPC meeting

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In an off-cycle review, the State Bank of Pakistan (SBP) raised its key interest rate by 300 basis points on Thursday, exceeding investor expectations, as the cash-strapped country seeks to encourage the International Monetary Fund (IMF) to release critical financing.

The key rate of the SBP now stands at 20%, its highest level since October 1996, with consumer price inflation now at its highest level for almost 50 years.

The Monetary Policy Committee’s (MPC) next meeting is set to be held on April 4.

Arif Habib Limited compiled key takeaways from the meeting’s outcome, here they are:

– National CPI has swelled up to 31.5% YoY during February 2023, with core inflation at 17.1% in urban and 21.5% in the rural basket.

– The near-term inflation outlook has deteriorated post external and fiscal adjustments undertaken recently.

– The MPC has raised its CPI forecast for the year to 27-29% against the November 2022 forecast of 21-23%.

– Inflation in upcoming months can drift higher, albeit, at a gradual pace, as the impact of said adjustments unfolds.

– The committee noted that external account challenges persist despite the significant contraction in the current account deficit, recorded at $242 million in January 2023 (lowest since March 2021).

– Pressure on forex reserves and rupee-dollar parity also remain in place, regardless of a 67% decline in current account deficit in the Jul-Jan 2023 period given ongoing debt repayments, and lower financial inflows amid “rising global interest rates and domestic uncertainties.”

– The conclusion of the ninth review of the IMF’s EFF remains crucial to address external-sector vulnerabilities.

– Additionally, the MPC urged the implementation of energy conservation measures to alleviate pressure on the external account and to meet vital imports from other sectors.

– Fiscal consolidation remains critical for economic stability and recent measures like increase in GST and excise duties, restricted subsidies, and adjustment in energy prices should help contain the widening fiscal and primary deficits.

– This will complement the ongoing monetary tightening and help bring down inflation over the medium term.

– The committee also assessed the impact of further monetary tightening on the country’s financial stability and near-term growth.

– It was observed that “risks to financial stability remain contained, given that financial institutions are broadly well capitalized.”

– However, growth will be compromised as a trade-off.

– However, the MPC reiterated that the long-term costs of letting inflation become entrenched outweigh the immediate costs of bringing it down.

– Barring any future shocks, the committee believes that today’s decision has pushed the real interest rate into positive territory on a forward-looking basis.

– The medium-term CPI target remains unchanged at 5-7%, by end-FY25. 

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The gold price in Pakistan today

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According to the All Sindh Sarafa Jewellers Association, the price of 10 grammes of 24 karat gold increased by Rs772 to Rs184,928 from Rs184,156, while the price of 10 grammes of 22 carat gold increased to Rs169,517 from Rs168,810.

These oscillations are strongly correlated with shifts in the US dollar’s value, demonstrating the complex interplay between gold prices and exchange rates.

This emphasises how local gold prices are impacted by events related to the global economy.

On the other hand, the cost of 24-karat silver was constant at Rs 2,570. Globally, too, the price of gold increased somewhat by $9 to $2,057 per ounce.

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Pakistan receives a $2 billion loan from China, according to the finance minister

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The $2 billion loan was one year ahead of schedule and became due in March. According to reports, Beijing had informed Islamabad of the decision.

The International Monetary Fund granted Pakistan’s cash-strapped economy a $3 billion standby arrangement last summer, but the country is still battling to recover from the financial crisis.

According to ratings firm Fitch, one of the top concerns confronting the next administration would be obtaining funding from bilateral and multilateral partners due to Pakistan’s precarious foreign situation, as was stated last week.

This event occurs one month after Anwaar-ul-Haq Kakar, the acting prime minister, asked for a $2 billion loan to be rolled over for a year in a letter to his Chinese counterpart.

In his letter, Kakar also expressed gratitude for China’s efforts to lessen Pakistan’s load

of foreign payments.

It is to be noted that Pakistan acquired safe deposits of $4 billion from China to address the balance of payments issue.

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“Ready to work with Pakistan’s new government,” the IMF said.

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In response to the former premier’s request, IMF Director of Communications Julie Kozak stated, “I’m not going to comment on ongoing political developments,” during a news conference.

She continued by saying that they “look forward to working on policies to ensure macroeconomic stability and prosperity for all of Pakistan’s citizens with the new government.”

In addition to stating that the plan is “supporting the authority’s efforts to stabilise the economy and to, of course, with a strong focus on protecting the most vulnerable,” Kozack said the lender increased the total disbursements under the Standby Arrangement (SBA) to $1.9 billion.

This has been accomplished by closely adhering to budgetary constraints and safeguarding the social safety net. In order to keep foreign exchange reserves growing and rein in inflation, a strict monetary policy stance has been maintained, the speaker stated.

The PTI founding chairman decided to write a letter to the international lender, asking it to demand an audit of the election held on February 8 before it proceeds with discussions with Islamabad for a new loan programme. This move prompted the IMF to release its statement.

In response to the former premier’s request, IMF Director of Communications Julie Kozak stated, “I’m not going to comment on ongoing political developments,” during a news conference.

She continued by saying that they “look forward to working on policies to ensure macroeconomic stability and prosperity for all of Pakistan’s citizens with the new government.”

In addition to stating that the plan is “supporting the authority’s efforts to stabilise the economy and to, of course, with a strong focus on protecting the most vulnerable,” Kozack said the lender increased the total disbursements under the Standby Arrangement (SBA) to $1.9 billion.

This has been accomplished by closely adhering to budgetary constraints and safeguarding the social safety net. In order to keep foreign exchange reserves growing and rein in inflation, a strict monetary policy stance has been maintained, the speaker stated.

The PTI founding chairman decided to write a letter to the international lender, asking it to demand an audit of the election held on February 8 before it proceeds with discussions with Islamabad for a new loan programme. This move prompted the IMF to release its statement.

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