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Pakistan’s Central Bank Raises Interest Rate to 22% in Bid to Secure IMF Support
(CTN News) – In an emergency meeting held on Monday, Pakistan’s central bank raised its benchmark interest rate by 100 basis points to 22%. This move comes as the country seeks to revise its budget for the fiscal year, starting from July 1, to rescue its International Monetary Fund (IMF) program, which is set to expire in the coming days.
Emergency Meeting Targets IMF Support and Bailout Package
Analysts believe that the interest rate hike aligns with the IMF’s demands and aims to secure a stalled tranche of $1.1 billion from the current bailout package, which is scheduled to expire on June 30. The central bank has been progressively increasing its main rate by 12.25 percentage points since April 2022, primarily to curb the escalating inflation rate.
According to the central bank’s statement, this action is necessary to maintain a positive real interest rate. Fahad Rauf, the head of research at Ismail Iqbal Securities, a Karachi-based brokerage firm, suggests that the IMF’s conditions likely drive the move.
While higher interest rates may increase the burden of debt servicing for both the government and private sector, securing the IMF program is seen as outweighing the potential negative implications in light of Pakistan’s fragile macroeconomic conditions.
The central bank’s monetary policy committee identified two recent domestic developments that have slightly worsened the inflation outlook and may further pressure the already strained external account.
These developments include upward revisions in taxes, duties, and the petroleum levy rate in the newly approved fiscal year 2023-24 budget and the central bank’s withdrawal of general guidance for commercial banks regarding import prioritization on June 23.
The committee perceives additional taxes as directly and indirectly contributing to inflation, while removing import guidance may exert pressure in the foreign exchange market, leading to a higher-than-anticipated exchange rate pass-through effect on domestic prices.
The Pakistan Stock Exchange responded positively to the news, with the KSE100 index closing up 3.42% as market participants anticipated a potential agreement with the IMF.
