SBP hikes interest rate to 17pc to tame inflation

KARACHI: Pakistan’s central bank on Monday increased its key interest rate by 100 basis points to 17 percent, the highest level since October 1997, as the economy struggles with soaring inflation, fast-depleting foreign reserves and stagnant external financing.

Most economists and the financial markets widely expected the rate increase. “The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer-than-anticipated period,” the State Bank of Pakistan (SBP) said in a statement, referring tothe Monetary Policy Committee (MPC).

“The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future,” it added. The SBP unexpectedly increased its benchmark rate by 100 bps during its last policy meeting in November, bringing the total increase to 725 bps since January 2022.

The SBP said despite some moderation in November and December, inflation continues to remain elevated. Importantly, core inflation has been on a rising trend for the past 10 months. Moreover, the recent pulse surveys show inching-up of consumers and business inflation expectations. In addition, near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit.

The lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in official reserves, it said. The global economic and financial conditions broadly remain uncertain in the near-to-short term, leading to mixed implications for the domestic economy. The expected slowdown in global demand could negatively impact the outlook of exports and workers’ remittances for emerging economies, including Pakistan.

“This would partly offset the gains from the import contraction. On the flip side, some moderation in the international commodity prices may help reduce inflation, and the improvement in global financial conditions may also provide some relief on the external sector,” it noted.

With rising inflation and a significant decline in reserves, which at $4.6 billion are not enough to cover even a month’s worth of imports, policymakers are confronting challenging times in the $350 billion economy. The nation is also having trouble recovering from last summer’s devastating nationwide floods.

Due to disagreements over a programme review that was supposed to be finished in November, a $1.1 billion IMF rescue tranche for Pakistan is delayed, making it difficult for the country to allay default fears in both local and international markets.

Jameel Ahmed, governor of the SBP, stated that Pakistan is out of default as major payments of $15 billion in external debt have been settled in the first half of FY2023 and that the $3 billion in external debt due this fiscal year will be successfully managed.

The governor told reporters after the monetary policy announcement that financing requirements, for this fiscal year, were $33 billion including $10 billion of current account deficit and $ 23 billion of external debt. The country has successfully settled principal repayments of $15 billion so far during the current fiscal year. Out of this amount, $9 billion were paid and $6 billion were rollover, he added.

Remaining $8 billion needs to be settled in the next five months of this fiscal year. Out of this amount, $ 3 billion will be rolled over and some $2.2 billion will be paid and reverted to Pakistan. The country has to pay external debt worth $3 billion by the end of June 2023 and this amount will also be managed successfully, he said.

Compared to the prior estimate of $10 billion, the current account deficit is expected to be less than $9 billion. The currency rate, according to him, is market-based and changes in accordance with market factors. The imbalance between inflows and outflows is what causes the difference in the exchange rate.

The governor said an investigation against banks for exchange rate manipulation is ongoing and a decision would be made soon.

He said, “The SBP has committed, and a decision will be made in the coming days. The decision could either be in the form of a regulatory fine or in the form of increased tax on foreign exchange income as banks made a gross income of around Rs100 billion in the nine months of 2022.”

The SBP is working with law enforcement agencies and taking steps to stop the illegal foreign exchange trade, he added. Speaking about the investigation into currency manipulation involving banks, Governor SBP stated that 13 banks had been scrutinised as part of the investigation and that more action will be taken in the coming days.

The SBP Governor emphasised that a speculative aspect had contributed to multiple exchange rates, including those in the black market, as a result of the high current account deficit and the delay in foreign inflows. The Governor is optimistic that the spread between the interbank and open market rates would narrow and that the speculative component will diminish with the expected short restart of the IMF programme.

The SBP has suspended, with immediate effect, the authorization of 11 outlets of eight exchange companies, for seven to fifteen days due to violations of regulatory instructions, it said in a statement.

The SBP conducted mystery shopping at the outlets of exchange companies wherein it was observed that the aforesaid outlets were refusing the sale of foreign currencies to their customers despite having the availability of the same at their counters. “All eleven (11) outlets have been restricted from undertaking any kind of business activity during the suspension period,” it said.