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

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  • 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.

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Tajir Dost app: traders don’t seem interested in registering

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To tax retailers in Pakistan, the Tajir Dost app was released. The sources stated that the government hopes to tax 3.5 million merchants through the app.

Ajmal Baloch, the president of All-Pakistan Anjuman-e-Tajran, stated that he made reservations with FBR on the SRO within a week.

The Federal Board of Revenue (FBR), according to him, cannot be a “Tajir Dost” because of its unethical actions.

Baloch believed that since electricity bills allow traders to pay a predetermined advance income tax, further taxes are unnecessary.

The trader, according to him, is already paying thirteen different kinds of taxes on the commercial meter. “A trader already pays between Rs. 15,000 and Rs. 20,000 in taxes annually, but you are requesting Rs. 1,200 per month in taxes.”

Mr. Ajmal summoned representatives of the Federal Board of Revenue (FBR) to a meeting with the trade associations to talk about the indirect taxes that the merchants are paying.

Additionally, he claimed that FBR officers are charging the traders, the majority of whom are less educated, “monthly charges.”

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Donald Lu visits Finance Minister Aurangzeb at the World Bank headquarters.

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Wednesday saw Minister for Finance and Revenue Muhammad Aurangzeb meet US Assistant Secretary of State for South and Central Asian Affairs Donald Lu and Principal Deputy Assistant Secretary Elizabeth Horst.

The finance minister briefed US officials on Pakistan’s reform plan at the World Bank. Meeting both delegations decided to improve bilateral ties.

Meeting topics included alternative energy, agriculture, climate, and tech industry. Boosting the Pakistan-US economic partnership was another finance ministry priority.

With US officials, Pakistan’s Finance Minister Muhammad Aurangzeb addressed IT, agriculture, and other business potential.

Pakistan would collaborate with the US International Development Finance Corporation and Exim Bank, according to Muhammad Aurangzeb.

His name is Donald Lu.
Over 30 years of US government service for Lu as a foreign service officer.

What Pakistan calls the “cipher” dispute involves the American official. The Pakistan Tehreek-e-Insaf (PTI) founder claimed that a supposed official letter between Washington and Islamabad proved his ousting as PM was a US conspiracy.

Washington has strongly refuted Khan’s allegations.

The State Department’s top South and Central Asia diplomat is Donald Lu, assistant secretary of state.

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Huge investment potential exists in the telecom and IT sectors. Shaza Fatima

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According to Shaza Fatima Khawaja, Minister of State for IT and Telecommunication, there are numerous investment prospects in Pakistan’s IT and telecom sectors.

She noted that the current administration is dedicated to fostering foreign investment in the nation, in line with the Prime Minister’s goal.

According to a news release, CEOs Wateen Adil Rashid and Muhammad Shahbaz Khan of Taavun (Pvt) Limited, who paid her a visit on Tuesday, spoke with Minister of State for IT and Telecommunication Shaza Fatima Khawaja.

She declared that the private sector would receive complete support because it is essential to growing our exports.

Regarding youngsters, she stated that they are our greatest asset and that efforts are being made to further their growth.

Sheikh Nahyan bin Mubarak Al Nahyan of the United Arab Emirates was thanked by Shaza Fatima for his particular interest in promoting additional investment in Pakistan’s telecom industry.

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