Pakistan’s central bank, the State Bank of Pakistan (SBP), has taken decisive action to address the country’s economic challenges by raising its benchmark interest rate to a record high in an emergency meeting. The move comes as Pakistan seeks to rescue its loan program with the International Monetary Fund (IMF), which is set to expire on Friday. With inflationary pressures looming and the need to demonstrate its commitment to stabilizing the economy, the SBP has increased the key rate by 100 basis points to 22%.
The decision to raise the benchmark rate was driven by the anticipated inflationary impact resulting from the recently announced budget and the lifting of import restrictions, according to a statement by the SBP. While acknowledging the necessity of these measures in the context of completing the ongoing IMF program, the SBP also noted that they have heightened the upside risks to the inflation outlook.
This latest rate hike marks a substantial increase of 12.25 percentage points since April 2022, with the primary objective of reining in soaring inflation. The SBP’s actions reflect its commitment to address the economic crisis that Pakistan is currently facing, with the hope of securing support from the IMF to help navigate through these turbulent times.
According to Fahad Rauf, the head of Karachi-based brokerage firm Ismail Iqbal Securities, the decision appears to be another condition set by the IMF. While higher interest rates may impose a burden on the government and private sector in terms of debt servicing, the potential positive outcome of securing the IMF program outweighs the negative implications, especially given the fragile macroeconomic conditions.
The SBP highlighted two significant domestic developments in its statement that have slightly worsened the inflation outlook and could further strain the already stressed external account. Recognizing the necessity of these measures to complete the ongoing IMF program, the bank emphasized that they have heightened the upside risks to inflation.
The SBP believes that raising the key rate will help anchor inflation expectations, which have already shown signs of moderation in recent months. The move aims to support efforts to bring down inflation to the medium-term target of 5-7% by the end of fiscal year 2025, provided no unforeseen developments occur.
The SBP’s Monetary Policy Committee (MPC) identifies additional taxes as contributing directly and indirectly to inflation, while the removal of import guidance may exert pressure on the foreign exchange market, leading to a higher-than-anticipated exchange rate pass-through to domestic prices.
By taking decisive action to address the challenges of inflation and stabilize the economy, the SBP aims to secure the IMF’s support for Pakistan. While the road ahead may present additional hurdles, the SBP’s proactive measures demonstrate a commitment to mitigating risks and steering the country towards sustainable economic growth.
