KARACHI: Pakistan State Bank on Monday raised the key policy rate by 150 basis points (bsp) to 12.25 percent, a week after the country reached an agreement with the International Monetary Fund (IMF) for a 39-month loan program worth $6 billion.
The hike, which is a record high in nearly eight years, comes amid fears of accelerated inflation under the new bailout plan given by the global lender.
Prime Minister Imran Khan had recently removed his Finance Minister, governor of central bank, and head of tax collecting agency Federal Bureau of Revenue (FBR) amid ongoing talks with the IMF.
The Monetary Policy Committee (MPC) meeting chaired by the new governor of SBP Reza Baqir announced the new policy rate which exceeds the market consensus of 100 bps.
“Further policy measures are required to address underlying inflationary pressures from higher recent month-on-month headline and core inflation out-turns, recent exchange rate depreciation, an elevated fiscal deficit and its increased monetization, and potential adjustments in utility tariffs,” the SBP said in the monetary policy statement.
Pakistan and the IMF entered into a loan agreement on May 12 which has certain conditionalities attached to it including keeping the interest rate higher than the expected inflation in future as compared to the current inflation rate, allow the currency to find its value in the market, and impose higher taxes while controlling government spending in terms of subsidies.
The IMF program is designed to restore macroeconomic stability and support sustainable economic growth, and is expected to unlock considerable additional external financing.
The government, marred by a widening fiscal deficit, has been relying heavily on central bank to finance the deficit which acted to dilute the impact of previous monetary tightening.
Since the last MPC meeting in March this year, the exchange rate also depreciated by 5.93 percent to PKR 149.65 per US dollar, at the close of May 20, 2019, reflecting a combination of underlying macroeconomic factors and market sentiment considerations, according to the central bank.
The SBP estimates show economic growth in FY19 with a modest rise in FY20. This slowdown is mostly due to lower growth in agriculture and industry while more than two-thirds of the real GDP growth in FY19 is expected to come from services.
Despite the improvement in the current account and a noticeable increase in official bilateral inflows, the financing of the current account deficit remained challenging. Consequently, reserves declined to $8.8 billion as of May 10, 2019 from $10.5 billion at the end of March 2019.
The exchange rate also came under pressure in the last few days. In SBP’s view, the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors. “SBP will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market,” the statement added.
The overall fiscal deficit is likely to be considerably higher during the first 10 months (Jul-Mar) of current fiscal year as compared to the same period last year due to a shortfall in revenue collection, higher than budgeted interest payments, and security related expenditures. From a monetary policy perspective, a growing portion of the fiscal deficit has been financed through borrowings from SBP.
The average headline CPI inflation reached 7 percent in Jul-Apr FY19 compared to 3.8 percent in the same period last year while it is anticipated to increase further in FY20 subject to a number of upside risks from an expected rationalization of taxes in the upcoming budget, potential adjustments in electricity and gas tariffs, and volatility in international oil prices.
The annualized headline month-on-month inflation has also risen considerably in the last three months due to the recent hike in domestic fuel prices, rising food prices and input costs — where these inflationary pressures are likely to continue for some time.
“The inflation outlook suggests a fall in real interest rates on a forward-looking basis,” the central bank noted.
SBP raises policy rate to 12.25% fearing worst inflation post IMF deal
SBP raises policy rate to 12.25% fearing worst inflation post IMF deal
- Hike comes amid anticipation of high inflation under IMF loan program
- Government’s heavy borrowing from central bank diluted the impact of previous monetary tightening
Thousands rally in Karachi after deadly mall fire, demand resignations and reforms
- Protesters cite fire that killed at least 67, blame civic failures, weak emergency response
- Rally adds pressure on Sindh’s ruling party amid anger over infrastructure and utilities
KARACHI: Thousands rallied in Karachi on Sunday demanding the resignations of local officials and systemic reforms following a devastating shopping mall fire that killed dozens last month.
The demonstration underscored deepening public anger over civic failures in Pakistan’s largest city.
Approximately 4,000 people marched under the slogan “Enough is enough” in a rally organized by the political Islamist party Jamaat-e-Islami (JI).
Demonstrators cited chronic water and power shortages, poor emergency services, and crumbling infrastructure as key grievances.
The blaze at the Gul Plaza Shopping Mall in January, which left at least 67 dead and over 15 missing, has intensified scrutiny of the city’s disaster preparedness and governance.
The protest’s main speaker, Jamaat e Islami’s Karachi chief Munim Zafar, demanded immediate compensation for the victims’ families and affected businesses. He also accused the city’s administration of failing to provide basic utilities and competent emergency services.
“Our demand is clear: compensation for the families of those who died in the Gul Plaza incident, and compensation for the traders who suffered losses. They should be given alternative support to help them rebuild their businesses,” Zafar said.
He said Karachi’s residents were being denied basic services and protection, calling for the resignations of senior city and provincial officials:
“The people of Karachi deserve to live with dignity, but you’re not providing them with basic necessities like water and electricity. When there’s a fire, you’re incapable of rescue, and when it rains, the city is flooded. Our infrastructure is in shambles ... Karachi needs an empowered local government system.”
The protest increases political pressure on the ruling Pakistan Peoples Party (PPP), which governs Sindh province and Karachi.
City and provincial authorities have previously pointed to rapid urbanization and funding limits when addressing infrastructure issues.
The offices of Karachi Mayor Murtaza Wahab and the Sindh government did not immediately respond to Reuters’ requests for comment on demonstrators’ requests.
