Monetary policy hike

With Parliament on hiatus, the State Bank of Pakistan held a Monetary Policy Committee meeting almost two weeks ahead of schedule, where it was decided to hike interest rates to try and control rampant inflation. After holding the rate steady at 9.75pc since January, the SBP had to finally raise its key policy rate by a hefty 250bps to 12.25pc.

In the year 2018, when Pakistan Tehreek-e-Insaf (PTI) took over the reins of the country, the interest rate in the country was 7%. However, due to the continuous increase in inflation and imbalance of payments, it has raised it to 12.25% today.

The bank also noted additional causes for concern, specifically external stability, which has largely been driven by the war in Ukraine and high oil prices. Despite the rate hike, the SBP continues to revise inflation for the ongoing year upwards, currently estimating that the number will exceed 11% for the fiscal year.

The bank also noted that “heightened domestic political uncertainty” contributed to the decline of the rupee and surge in local bond and Eurobond yields. The rise in interest rate will have a very negative effect on the corona-stricken economy, in particular, there will be a significant increase in the production costs of trade and industry.

Another concern is that Pakistan’s sovereign debt remains in “distressed debt” territory, according to news reports. That label means that banks and other investors consider Pakistan to be at high risk of defaulting on its debt, and the country must offer unusually high returns on financial instruments to make them attractive.

Meanwhile, foreign reserves remain under pressure as previously planned bond sales have been delayed, and refinancing with China has not been completed. Rising interest rates will accelerate the contraction of the economy. The current account deficit will not further exceed. Therefore, high interest rates are by no means a viable option for the economy.