SBP Commits Not to Launch New Refinancing Schemes, IMF Country Report States

SBP Commits Not to Launch New Refinancing Schemes, IMF Country Report States

Karachi, July 20, 2023 – The State Bank of Pakistan (SBP) has made a commitment not to introduce new refinancing schemes, according to the latest country report on Pakistan issued by the International Monetary Fund (IMF).

This decision comes as the SBP aims to maintain a tighter monetary policy stance to combat inflation and support the country’s external sector rebalancing through the exchange rate.

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Refinancing schemes have traditionally played a crucial role in providing lower interest rates for export facilitation and promoting industrial activities within Pakistan. However, the IMF report emphasized the need for a more conservative approach, as the impact of exchange rate corrections continues to reverberate through the economy.

The latest policy rate move by the SBP has been seen as a positive step. However, the authorities remain cautious about inflationary pressures quickly receding and returning to their targeted 5–7 percent inflation range by the end of FY25.

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The IMF staff noted that the SBP will need to continue its tightening cycle to re-anchor inflation expectations, as inflationary pressures are expected to persist in the coming year. The aim is to achieve real positive interest rates and place inflation on a clear downward path. This may involve higher interest rates and prudent use of liquidity injections as necessary, based on incoming data.

In the past, the monetary policy of the SBP fell behind the curve, leading to price pressures reaching a five-decade high inflation rate and un-anchored inflation expectations. Frequent pauses in the policy rate tightening cycle and significant increases in the size of SBP’s open market operations (OMOs) contributed to loose monetary policy conditions at a time when inflation was already rising.

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The SBP’s decision to refrain from introducing new refinancing schemes indicates a commitment to stabilizing the economy and maintaining a tight monetary policy stance to combat inflation effectively. At the same time, the SBP aims to improve the monetary transmission and the monetary operation framework for better economic management.

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As the situation evolves, the central bank will closely monitor incoming data and adjust its policies accordingly to achieve its inflation targets and support Pakistan’s economic stability and growth.