Another IMF condition fulfilled as SBP raises interest rate by 1pc to 22pc
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Pakistan has fulfilled another condition of the International Monetary Fund (IMF) for getting much needed loan tranche by raising interest rates by 1 percent to 22 percent on Monday.

Earlier this week, the government announced additional taxation measures of Rs215 billion and cut expenditures by Rs85 billion to control the budget deficit. With this recent increase, the interest rate has increased to 22 percent from 21 percent.

Following its meeting on 12th June, the Monetary Policy Committee (MPC) viewed the monetary policy stance as appropriate for achieving price stability “barring any unexpected domestic and external shocks.” In addition, the MPC noted that this outlook was contingent upon effectively addressing domestic uncertainty and external vulnerabilities.

Although the inflation outlook has slightly deteriorated since the last meeting, the Committee has noted two significant developments that could add pressure to the already stressed external account. On June 25, the National Assembly approved certain revisions to the FY24 budget, including taxes, duties, and PDL rates. In addition, the SBP revoked its general guidance on import prioritization for commercial banks on June 23. MPC views these measures as necessary in light of the ongoing IMF program, but they have raised inflation risks to the upside. A relaxation in imports may exert pressure on the foreign exchange market, while additional tax measures could contribute to inflation directly and indirectly. Consequently, domestic prices may rise more than expected as a result of the latter.

Due to these developments, the MPC called an emergency meeting. As a result of the MPC’s decision, the policy rate has been raised by 100 basis points to 22 percent, effective 27th June 2023. This action is considered necessary by the MPC to keep real interest rates firmly in positive territory. Inflation expectations will be further anchored – which have already begun to moderate – and inflation will be lower by the end of FY25, assuming no unforeseen developments arise.

MPC believes that yesterday’s decision – along with the expected completion of the ongoing IMF program and the government generating a primary surplus in FY24 – will help address external sector vulnerabilities and reduce economic uncertainty. In order to achieve price stability over the medium term, the Committee will continue to carefully monitor economic developments and is ready to take appropriate action if necessary.