KARACHI: Fulfilling another condition of IMF for revival of loan programme, Pakistan’s central bank jacked up its key policy rate by 300 basis points to 26-year high at 20 percent at preponed meeting yesterday. Hike is 100 basis points higher than financial market consensus of 200 basis points. Earlier, IMF had asked government to hike rate to resume much-needed $ 6.5 billion loan programme which is critical to boost foreign exchange reserves and avert imminent default on foreign debt repayments. State Bank of Pakistan said in its monetary policy statement that it has revised its inflation projection to 27 to 29 percent for current fiscal year against its November 2022 projection of 21 to 23 percent for year.

“National CPI inflation has surged to 31.5 percent year-on-year, while core inflation rose to 17.1 percent in urban and 21.5 percent in rural basket in February 2023,” it said. In meeting, monetary policy committee noted that recent fiscal adjustments and exchange rate depreciation have led to significant deterioration in near-term inflation outlook and further upward drift in inflation expectations, as reflected in latest wave of surveys.

MPC emphasised that anchoring inflation xpectations is critical and warrants strong policy response. On external side, MPC noted that despite substantial reduction in current account deficit (CAD), vulnerabilities continue to persist. In January 2023, CAD fell to $ 242 million, lowest level since March 2021.

Cumulatively, CAD at $ 3.8 billion in Jul-Jan FY23 is down 67 percent compared to same period last year. “Notwithstanding this improvement, scheduled debt repayments and decline in financial inflows amid rising global interest rates and domestic uncertainties, continue to exert pressure on FX reserves and exchange rate”. “MPC noted that FX reserves remain low and concerted efforts are needed to improve external position. In this regard, conclusion of ongoing 9th review under IMF’s EFF will help address near-term external sector challenges.”

Published in The Daily National Courier, March, 03 2023

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