Business

Monetary policy: SBP jacks up interest rate to 15% — highest since November 2008

Published

11 months ago

Farwa

SBP has cumulatively increased the rate by 800 basis points since Sept 2021 to control inflation.
MPC to meet next on August 22; will carefully monitor developments affecting prospects for inflation.
Central bank expects rate hike to help prevent de-anchoring of inflation expectations, provide support to rupee.

KARACHI: In line with the market expectation, the State Bank of Pakistan (SBP) on Thursday aggressively raised the benchmark interest rate by a massive 125 basis points to 15% — the highest since November 2008.

The rate hike came as the coalition government is trying hard to revive the much-awaited International Monetary Fund (IMF) for the resumption of a $6-billion loan programme that had been stalled since early April.

The central bank has cumulatively increased the rate by 800 basis points since September 2021 to control inflation and narrow the current account deficit.

During today’s meeting, under the chair of Acting Governor Dr Murtaza Syed, it was decided that the interest rates on export finance scheme (EFS) and long-term financing facility (LTFF) loans are now being linked to the policy rate to strengthen monetary policy transmission while continuing to incentivise exports by presently offering a discount of 500 basis points relative to the policy rate.

According to a statement issued by the central bank, this combined action continues the monetary tightening underway since last September, “which is aimed at ensuring a soft landing of the economy amid an exceptionally challenging and uncertain global environment.”

“It should help cool economic activity, prevent a de-anchoring of inflation expectations and provide support to the rupee in the wake of multi-year high inflation and record imports,” the statement read.

Three major developments since May

The central bank noted that since the last meeting, the Monetary Policy Committee noted “three encouraging developments”.

The unsustainable energy subsidy package was reversed and an FY23 budget centered on strong fiscal consolidation was passed which has paved the way for completion of the on-going review of IMF programme
A $2.3 billion commercial loan from China helped provide support to foreign exchange reserves, which had been falling since January due to current account pressures, external debt repayments and paucity of fresh foreign inflows
Economic activity remained robust, with the momentum of the last two years of near 6% growth carrying into the start of FY23.

However, the MPC noted that several adverse developments overshadowed this aforementioned positive news.

It stated that globally, inflation is at multi-decade highs in most countries and central banks are responding aggressively, leading to depreciation pressure on most emerging market currencies. While domestically, as energy subsidies were reversed, both headline and core inflation increased significantly in June, rising to a 14-year high.

‘Pakistan facing large negative income shock’

“Against this challenging backdrop, the MPC noted the importance of strong, timely and credible policy actions to moderate domestic demand, prevent a compounding of inflationary pressures and reduce risks to external stability,” the statement read.

The MPC members stated that like most of the world, “Pakistan is facing a large negative income shock from high inflation and necessary but difficult increases in utility prices and taxes.”

The central bank believes that without decisive macroeconomic adjustments, there is a significant risk of substantially worse outcomes that would compromise price stability, financial stability and growth.

Hinting at further monetary policy tightening in the next meeting scheduled to be held on August 22, the MPC noted that the runaway inflation and foreign exchange reserves depletion would require sudden and aggressive tightening actions later that would be significant “more disruptive for economic activity and employment.”

“Adjustment is difficult but necessary in Pakistan, as it is all over the world. However, in the interest of social stability, the burden of this adjustment must be shared equitably across the population, by ensuring that the relatively well-off absorb most of the increase in utility prices and taxes while well-targeted and adequate assistance is provided to the more vulnerable,” it stated.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth and will take appropriate action to safeguard them,” the central bank said.

Business

APCC to meet today to decide budget outlay, targets

Published

2 days ago

Farwa

APCC will meet at the Ministry of Planning today.
Govt considering allocation for Diamer Basha Dam in budget.
Total PSDP size would be proposed at Rs1,000bn.

ISLAMABAD: The Annual Plan Coordination Committee (APCC) is likely to recommend around Rs900-1,000 billion macroeconomic framework and size of the federal development outlay for the upcoming budget for the next fiscal year 2023-24, The News reported Friday.

In the federal budget, against the revised estimates of Rs111 billion in the outgoing financial year, the government is all set to recommend a Rs90 billion proposed allocation for the controversial Sustainable Development Goals Achievement Programme (SAP) for parliamentarians.

Now the arrangements are underway for further jacking up the allocation of the SDG Achievement Programme from Rs111 billion to Rs116 billion for the outgoing fiscal year.

Well-placed sources in the Cabinet Division told The News that parliamentarians belonging to Balochistan and Sindh provinces largely presented flood-related schemes under the SDG Achievement Programme in the current fiscal year.

The World Bank and Asian Development Bank (ADB) were also providing $3 billion in loans for flood-related schemes in the aftermath of the severe floods, so at least there should be some kind of mechanism to avoid overlapping at the cost of the national exchequer.

There were 50 to 60% of small development schemes in Sindh and Balochistan related to floods in the outgoing financial year.

There are reports that one political party, which is one of the major allies of the ruling coalition at the federal level, placed a condition that all funds on behalf of their parliamentarians should be handed over to the political leader, who would disburse their share to each parliamentarian belonging to the party.

All major allies of the Pakistan Democratic Movement-led government are beneficiaries of this SAP programme, as its funding has gone up from Rs68 billion at the initial level to Rs116 billion in the ongoing financial year.

The APCC, which is scheduled to meet in the Ministry of Planning today (Friday), will consider approval of the macroeconomic framework, including a real GDP growth rate of 3.5% and CPI-based inflation at 21% for the upcoming budget 2023-24.

According to the working paper prepared by the Ministry of Planning on Thursday, the Ministry of Finance gave an indicative budget ceiling for the Public Sector Development Programme (PSDP) to the tune of Rs700 billion for the next budget for 2023-24 but the Minister for Planning hoped that it would be jacked up to Rs800 billion under the directives of Prime Minister Shehbaz Sharif.

Now that the government has proposed an allocation of Rs200 billion for the Viability Gap Fund (VGF) executed through public-private partnerships (PPP), the total PSDP size would be proposed at Rs1,000 billion at the federal level for the next financial year.

The share of the National Highway Authority (NHA) in the proposed PSDP would be reduced, ranging from Rs90 billion to Rs100 billion for the next budget, mainly because the NHA remained unable to utilise the major chunk of the total allocated amount in the ongoing financial year.

The government is all set to propose allocations for flood mitigation and reconstruction efforts in the coming financial year. The government is also considering making an allocation for the Diamer Basha Dam in the coming budget for 2023-24.

Business

Is Pakistan launching digital currency?

Published

2 days ago

Farwa

KARACHI: After making impressive progress in digital banking, the State Bank of Pakistan (SBP) is planning to launch a digital currency in the future, The News reported Friday.

Central Bank’s Digital Financial Services Group Additional Director Shoukat Bizinjo said that a large number of central banks around the world, including Pakistan’s, are studying CBBCs (callable bull/bear contracts) in order to launch digital currency in their respective countries.

Bizinjo — while speaking at the 16th international conference on Mobile Commerce 2023 — said: “Pakistan’s central bank is reviewing and consulting with other central banks in this regard (CBBCs and digital currency).”

They are leveraged investments that track the performance of the underlying assets without requiring investors to pay the full price required to own the actual assets. Bizinjo said that the SBP is also in consultation with local industrial players to introduce digital currency.

He said that Electronic Money Institutions (EMIs) have made remarkable progress in e-banking through the launch of e-money wallets for consumers and merchants, and other digital payment instruments such as prepaid cards and contactless payment instruments.

Currently, the country has four live commercial EMIs, including NayaPak, Finja, CMPECC, and Sada Tech Pakistan. EMIs have an outstanding e-money balance of Rs2 billion, managing 1.6 million e-money wallets and 2.4 million payment cards as of March 31, 2023.

There are around 12 EMIs at different stages of acquiring licenses from the central bank. There are also dozens of companies that are in constant talks with the SBP to become EMIs.

Business

Pakistan rules out Plan B rumours in case of IMF programme failure

Published

2 days ago

Farwa

Budgetary framework has been shared with IMF, says minister.
Dr Pasha says IMF did not accept external financing gap of $4.5bn.
Adds there is a trust deficit because of PTI govt.

ISLAMABAD: Minister of State for Finance Dr Aisha Ghaus Pasha has ruled out any possibility of contemplating upon any other option — Plan B — in case Pakistan fails to woo the International Monetary Fund (IMF) to revive the stalled loan programme, The News reported Friday.

“Let me say with clarity there were no other options that we are contemplating upon under Plan B in case of no revival of the Fund programme as the government was committed to reviving the IMF programme by completing the pending ninth review,” she said.

During a briefing of the National Assembly Standing Committee on Finance at the Federal Board of Revenue (FBR) headquarters, MNA Ali Pervez Malik questioned Dr Pasha about Plan B in case of failure to revive the IMF programme and said that there was talk about a dollar amnesty scheme to improve dollar liquidity.

The minister further revealed that the Fund did not accept the external financing gap of $4.5 billion assessed by Pakistan.

Dr Pasha disclosed that the IMF was still sticking to its projection of a financing gap of $6 billion for the ongoing financial year against Islamabad’s assessment of $4.5 billion on which assurances extended to the IMF by multilateral as well as bilateral creditors.

She went on to say that the government has shared the budgetary framework for the next fiscal year to satisfy the IMF. However, Pakistan has been waiting for the IMF’s response to share its recent steps to bridge the gap between interbank and open market rates on exchange rates, and assurances on external financing gaps.

It should be noted that a broader agreement on these three major conditions could only pave the way for striking a staff-level agreement.

The minister clarified that the sharing of budgetary numbers is not the part of ninth review as it will be part of the 10th review but Prime Minister Shehbaz Sharif has decided to share the numbers for the revival of the Fund programme.

A senior official of the State Bank of Pakistan informed the NA panel that the permission granted for credit cards from exchange companies to interbank rate would require $70 million to $100 million on average on a monthly basis and recommended the FBR for raising taxes on transactions through credit cards in foreign exchange in the upcoming budget to compress demands for increased foreign exchange requirements.

Dr Pasha said that there was a trust deficit, not because of the incumbent regime, but blamed the last PTI-led government for breaching the IMF agreement by doling out un-targeted fuel and electricity subsidies just before leaving the government in the last financial year.

She said that Saudi Arabia had granted assurances of $2 billion in additional deposits, while $1 billion have been committed by the United Arab Emirates (UAE).

The World Bank committed $450 million through the RISE-II programme loan and $250 million through Asian Infrastructure Investment Bank (AIIB).

The remaining are expected through Geneva pledges in the aftermath of flood assistance.

Pakistan, she said, secured financing assurances of $4.5 billion. Initially, it was planned that out of $6 billion, the government would get assurances on $3 billion before signing the staff-level agreement. She said that the government paid back $3 billion to commercial banks with the understanding that it would get re-financed these loans once the SLA is done.

“We also expect that after the revival of the IMF programme, other avenues of securing dollars will also open up” she added.

The ongoing IMF programme is going to expire on June 30 therefore the time is limited for completion of the pending 9th review under the $6.5 billion Extended Fund Facility (EFF).

If the staff-level agreement is reached by evolving a broader consensus on three contentious issues including external financing, budgetary framework, and sticking to the free market exchange rate then the programme will be revived otherwise the programme will be met with failure.

However, the sources said that Pakistan would be left with no other option but to seek another IMF programme next fiscal year keeping in view debt external repayments of $25 billion.

It does not include the current account deficit and if it is projected in the range of $7-8 billion for the next fiscal year then the total external financing requirements will be stretched up to $32-33 billion in 2023-24.