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Monetary policy: SBP maintains status quo, holds interest rate at 15%

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  • SBP hints at tightening policy rate in next meeting scheduled to be held on October 10.
  • Central bank had cumulatively increased rate by 800bps from Sept 2021 to Jul 2022.
  • In today’s meeting, MPC said it was “prudent to take a pause at this stage”.

KARACHI: In line with the market expectations, the State Bank of Pakistan (SBP) Monday maintained the status quo in the interest rate at 15% — the highest since November 2008.

The monetary policy committee (MPC) met under the chair of Deputy Governor Syed Murtaza and reviewed the economic indicators. Despite record high inflation the central bank decided to keep the interest rate unchanged for the next six weeks.

The central bank had cumulatively increased the rate by 800 basis points from September 2021 to July 2022 to control inflation and narrow the current account deficit. However, the central bank kept the interest rate unchanged in today’s meeting for the next six weeks.

The central bank today felt that it was “prudent to take a pause at this stage” as it noted that recent inflation developments are in line with expectations, domestic demand is beginning to moderate and the external position is also showing some improvement due to a lower trade deficit and resumption of the International Monetary Fund (IMF) programme.

“This pause allows MPC to assess the impact of 800 bps tightening since September and fiscal consolidation planned for FY23,” the monetary policy statement mentioned, adding that it is also in line with recent actions by other emerging markets central banks, who have been holding rates in recent meetings as global growth and commodity prices have slowed.

The committee also noted that in order to contain external pressures and support the rupee going forward, “it is important to contain the current account deficit by delivering the budgeted fiscal consolidation, lowering energy imports through energy conservation measures, and keeping the IMF programme on track.”

Since the last meeting on July 7, MPC noted three key domestic developments, which include:

  • Headline inflation rose further to 24.9% in July, with core inflation also ticking up.
  • Trade balance fell sharply in July and the rupee has reversed course during August, appreciating by around 10% on improved fundamentals and sentiment.
  • IMF’s board meeting will take place on August 29 and is expected to release a further tranche of $1.2 billion, as well as catalysing financing from multilateral and bilateral lenders.

Moreover, the committee also noted that Pakistan has also successfully secured an additional $4 billion from friendly countries over and above its external financing needs in the fiscal year 2022-23. As a result, foreign exchange reserves will be further augmented through the course of the year, helping to reduce external vulnerability.

‘Outlook subject to uncertainty’

In its forward guidance, the central bank hinted at tightening the policy rate in the next meeting scheduled to be held on October 10. 

“MPC intends to remain data-dependent, paying close attention to month-on-month inflation, inflation expectations, developments on the fiscal and external fronts, as well as global commodity prices and interest rate decisions by major central banks,” it said.

The central bank projected that in the coming months, curbing food inflation through supply-side measures that boost output and resolve supply-chain bottlenecks should be a high priority.

‘Inflation to peak in first quarter’

“Looking ahead, headline inflation is projected to peak in the first quarter before declining gradually through the rest of the fiscal year. Thereafter, it is expected to decline sharply and fall to the 5-7% target range by the end of fiscal year 2023-24, supported by the lagged effects of tight monetary and fiscal policies, the normalisation of global commodity prices, and beneficial base effects,” it said.

The central bank said that this baseline outlook “remains subject to uncertainty”, with risks arising from the path of global commodity prices, the domestic fiscal policy stance, and the exchange rate.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth,” it maintained.

‘Good decision’

Terming the decision taken by the central bank as “good”, Alpha Beta Core CEO Khurram Schehzad lauded the central bank for not raising the interest rate anymore.

“Decline in global commodities should give respite to import bill, however, monetary policy tightening and its transition would continue to be under-effective given massive fiscal deficit and governance issues.,” he said, adding that fiscal prudence is key to country’s economic issue.

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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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In a new IMF agreement, Pakistan would “raise” the FBR tax-to-GDP ratio to 15%.

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The state bank reserves will be maintained at a level equivalent to three months’ worth of import bills, according to sources in the Finance Ministry.

According to sources, the ministry has also set a goal to maintain the primary balance surplus and reduce the current account deficit.

The ministry insisted that once the existing agreement expires, a new one would be negotiated with the IMF, and that the IMF will also be guaranteed that the requirements will be implemented prior to the agreement being finalised.

The founder of Pakistan Tehreek-e-Insaf (PTI) demanded that an audit of the election results be conducted before the International Monetary Fund (IMF) approved any additional loans for Islamabad. However, the IMF showed earlier today that it was eager to cooperate with the new administration in Pakistan by disregarding the demand.

According to Bloomberg News yesterday, Pakistan is to apply for a fresh $6 billion loan from the International Monetary Fund to assist the next government in paying off billions of dollars in debt that comes due this year.

According to the article, the nation would attempt to negotiate an Extended Fund Facility with the IMF, and it was anticipated that discussions with the international lender would begin in March or April.

Thanks to a short-term IMF bailout, Pakistan avoided defaulting last summer. However, the plan expires next month, and the next administration will need to negotiate a long-term deal to keep the $350 billion economy steady.

The IMF forced the South Asian country to enact a number of reforms prior to the rescue, including raising its benchmark interest rate, changing its budget, and raising the cost of natural gas and electricity.

According to a fund spokeswoman, the IMF staff is still in communication with authorities on the necessary longer-term reform initiatives. The fund is also prepared to assist the post-election government in addressing Pakistan’s ongoing issues by means of a new arrangement, should that request be made.

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