IMF endorses status quo in SBP’s policy rate

The International Monetary Fund (IMF) has endorsed the State Bank of Pakistan’s (SBP) decision to keep the interest rate unchanged despite a sharp deceleration in inflation.

The IMF-Pakistan SBA (2nd and Final Review) Country Report made it clear that the Fund was willing to see no change in the interest rate despite demand from the stakeholders in the wake of falling inflation, which has widened the gap between the 22 per cent interest rate and expected 13 to 15pc estimated CPI in May.

“The IMF staff endorsed the SBP’s Monetary Policy Committee decision to maintain the policy rate,” said the report. It is believed that the unprecedented interest rate has crippled economic growth, which is estimated to expand at 2pc in FY24 after contracting in FY23.

Most analysts and research houses believe that inflation in May is likely to be between 13 and 15pc, providing enough room to bring down the interest rate.

However, the IMF’s endorsement of SBP’s decision to maintain a status quo indicates that it may be kept steady despite an expected gap of about 7 to 9pc between inflation and the policy rate.

The IMF report further said that any relaxation of the policy stance should be justified by evidence of declining inflation, controlled pass-through effects, and limited exchange rate pressures from forex market normalisation. “The authorities remain committed to a flexible exchange rate and transparent interbank FX market,” said the report.

The IMF recommended the continued proactive accumulation of reserves through interbank purchases, noting positively that the reduction of the SBP’s swap/forward position has alleviated forward premia compression, said the report. The IMF also cautioned that the recent stability of the rupee should not lead to expectations of its persistence in the future.

Reforms for the sustainability of the power sector require solid cost-side reforms. The authorities need to speed up work on improving transmission and distribution infrastructure, Discos’ performance via privatisation or long-term management concession, moving captive demand to the national grid, revisiting terms of PPA where feasible, and converting Power Holding Private Ltd debt into cheaper public debt.

Separately, an International Monetary Fund (IMF) mission will meet Pakistani authorities next week to discuss the “next phase of engagement”, an official from the international money lender said on Sunday. Speaking to media, Esther Perez Ruiz, the Fund’s resident representative for Pakistan, said: “A mission team led by Nathan Porter, IMF’s mission chief to Pakistan, will meet with authorities next week to discuss the next phase of engagement. “The aim is to lay the foundation for better governance and stronger, more inclusive, and resilient economic growth that will benefit all Pakistanis,” she added.

Pakistan last month completed a short-term $3 billion programme, which helped stave off sovereign default, but the government has stressed the need for a fresh, longerterm programme.

Last week, the Fund said that a mission was expected to visit Pakistan this month to “discuss the FY25 budget, policies, and reforms under a potential new programme for the welfare of all Pakistanis”. Pakistan narrowly averted default last summer, and the $350bn economy has stabilised after the completion of the last IMF programme, with inflation coming down to around 17 per cent in April from a record high 38pc last May.

The country is still dealing with a high fiscal shortfall and while the external account deficit has been controlled through import control mechanisms, it has come at the expense of stagnating growth, which is expected to be around 2pc this year compared to negative growth last year. Pakistan is expected to seek at least $6bn and request additional financing from the Fund under the Resilience and Sustainability Trust.