According to analysts at Arif Habib Limited, the State Bank of Pakistan (SBP) has increased the benchmark policy rate by 100 basis points to a record high of 21%.
This decision was made in the April 4, 2023 monetary policy meeting, following a previous hike of 300 basis points in March 2023. Despite expecting inflation to remain high, the committee hopes to stabilize prices and anchor inflation to the medium-term target.
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Since the last meeting, the current account deficit has compressed due to reduced imports, but the overall balance of payments position remains under stress and foreign exchange reserves are still low. Progress has been made towards completing the IMF’s 9th review under EFF, but difficulties in the global banking system have led to further tightening in liquidity and financial conditions, making it difficult for emerging markets like Pakistan to access international capital.
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Economic activity indicators suggest a slowdown in key sectors such as automobile and petroleum sales, large scale manufacturing, and electricity generation. While cotton arrivals have met expectations, wheat production is likely to miss its target. The fiscal deficit has narrowed, but tax revenue has not grown adequately and debt servicing has increased. The contraction in private sector credit is due to a decrease in fixed investment and consumer loans, while working capital loans have seen a marginal seasonal uptick.
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Inflation has been driven by higher taxes and duties, tapering off of untargeted subsidies, and recent exchange rate depreciation. Core inflation has risen to 18.6% in urban and 23.1% in rural areas. The MPC believes that the current stance is appropriate to keep the real interest rate in positive territory on a forward-looking basis and to anchor expectations of elevated inflation. The committee also emphasizes the need to achieve fiscal consolidation to complement ongoing monetary tightening.
