Karachi, April 27, 2024 – Financial circles are abuzz as the State Bank of Pakistan (SBP) is widely anticipated to hold its policy rate steady at 22 percent in the forthcoming monetary policy announcement scheduled for April 29, 2024.
This critical decision precedes the International Monetary Fund’s (IMF) executive board meeting, which will discuss a pivotal $1.1 billion tranche under discussion, part of a larger $3 billion standby arrangement aimed at stabilizing Pakistan’s economic foothold and preventing a sovereign default.
The move of the State Bank is particularly significant as it comes at a time when Pakistan is in the throes of finalizing a new and larger loan arrangement with the IMF, indicating a strategic positioning by the SBP to stabilize economic parameters before entering into fresh negotiations. Finance Minister Muhammad Aurangzeb has highlighted that discussions with the IMF are expected to start next month, with the government aiming for a staff-level agreement by early July.
The decision to maintain the current interest rate is influenced by various economic factors, including the ongoing need to manage inflation which, though reduced from its peak of 38 percent in May 2023 to 20.7 percent this past March, remains a challenge. The maintenance of a high policy rate since the last increase in June reflects the central bank’s cautious approach towards inflationary pressures and aligns with the prerequisites set forth by the IMF.
Economic analysts, such as those from Arif Habib Limited, predict that the SBP is unlikely to adjust the rates downwards until a new agreement with the IMF is firmly in place. They also point to external factors such as the ongoing geopolitical tensions in the Middle East, which may affect global oil prices, and the pace of monetary easing by the U.S. Federal Reserve, as additional considerations influencing the central bank’s decision.
Interestingly, some market analysts do foresee a possible minor rate cut within this quarter, perceived as a symbolic gesture ahead of more significant reductions expected around September 2024. Such adjustments would strategically serve to alleviate some of the debt servicing pressures as the government faces the rollover of approximately Rs 6.7 trillion in maturing domestic treasury bills by the end of this year.
The history of SBP’s engagement with IMF-led programs suggests a tendency towards rate reductions in the initial year of such agreements, setting expectations for a gradual stabilization of the policy rate to around 17 percent by the end of December 2024. As Pakistan navigates these crucial junctures, the outcomes of the upcoming monetary policy and subsequent negotiations with the IMF will be pivotal in determining the near-term economic trajectory of the country.
As the decision day draws near, all eyes are on the SBP, whose policy maneuvers are crucial not only for meeting international fiscal and monetary targets but also for reinforcing domestic economic stability amidst a complex web of global and local pressures. This balance will undoubtedly influence market sentiments and shape the economic landscape for Pakistan in the coming months.
