Pakistan raises key interest rate to 25-year high of 20% as crisis deepens

Average inflation this fiscal year ending June is now expected in the range of 27% to 29%

A worker offloads supplies at a shop in Peshawar. Price gains in Pakistan quickened for a third month in February. EPA
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Pakistan’s central bank raised its benchmark interest rate to 20 per cent to rein in soaring inflation that it expects to quicken further as the country works to resume a $6.5 billion International Monetary Fund bailout.

The State Bank of Pakistan’s monetary policy committee increased the target rate by 300 basis points from 17 per cent, the central bank said on its website on Thursday.

The move was seen by six out of 38 economists, most of whom expected a 200 bps increase.

The current 20 per cent rate is the highest since June 1997, when the central bank used a different benchmark, according to data compiled by Bloomberg.

“The MPC noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near-term inflation outlook and a further upward drift in inflation expectations,” the central bank said.

“The short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched.”

Average inflation this fiscal year ending June is now expected in the range of 27 per cent to 29 per cent, against the November projection of 21 per cent to 23 per cent, it said.

Price gains quickened for a third month in February to 31.55 per cent, the most since the 1960s, according to central bank data.

“The committee expects inflation to rise further in the next few months as the impact of these adjustments unfolds before it begins to fall, albeit at a gradual pace,” the central bank said.

The central bank will hold its next monetary policy review on April 4.

The latest tightening comes as the nation tries to secure the IMF bailout to avert a debt default, unlock more funding and stave off severe supply shortages.

There are $7 billion worth of repayments in the coming months, including a $2 billion Chinese loan due in March, according to Fitch Ratings.

Pakistan needs to repay about $3 billion while $4 billion is expected to be rolled-over until June, central bank Governor Jameel Ahmad said in an analyst briefing.

He said the nation remained “committed to make all debt payments”.

To secure the IMF loan, the south Asian nation has increased taxes, raised energy prices and allowed the currency to depreciate — all of which risk feeding into inflation, complicating the situation for the monetary authority.

Finance ministry officials will hold virtual talks with the multilateral lender until Friday, local news station Geo TV reported, citing Finance Minister Ishaq Dar.

The State Bank of Pakistan’s larger-than-expected rate increase in an off-cycle meeting on Thursday shows how desperately the country needs aid from the International Monetary Fund to avoid default, said Ankur Shukla, Bloomberg India economist.

Foreign exchange reserves stood at $3.26 billion as of February 17, enough for less than a month of imports.

A dollar shortage is restricting the nation’s ability to fund overseas purchases, stranding thousands of containers at ports, forcing plant shutdowns and putting tens of thousands of jobs at risk.

The central bank said its foreign currency reserves were low and concerted efforts were required to improve the country's external position.

The IMF loan will help to address near-term challenges, it said.

Moody’s Investors Service downgraded Pakistan deeper into junk this week, citing fragile liquidity conditions.

Updated: March 03, 2023, 4:11 AM