IMF urges Pakistan to hike interest rates
Islamabad: The International Monetary Fund (IMF) on Wednesday said that Pakistan needed to further increase interest rates to stabilise inflation a policy advice that is not in line with the ground realities and has instead significantly increased the country’s debt burden.
The global lender has released its regional economic outlook for the Middle East and Central Asia, describing the economic conditions in an important part of the world.
“Inflation has continue to rise in Egypt, Pakistan and Tunisia, with the comparison of current policy interest rates relative to natural policy rate estimates suggesting that further interest rate increases are need to stabilise inflation,” reads the report.
The IMF defines the natural policy rate as the real natural rate plus one-year-ahead inflation expectations from the World Economic Outlook databases.
For this fiscal year, the World Economic Outlook has projected 27.1% average inflation rate. The forecast is 21.9% for the next fiscal year.
The central bank has already increased the interest rates to the highest ever level of 21% that could not contain inflation, which surged to 36.4% in April –- the highest level in the past 59 years.
The significant surge in the government’s debt servicing cost, currently estimate at around Rs5.3 trillion as oppose to the budgeted figure of Rs3.95 trillion, was cause by the increase in interest rates.
Since the start of the IMF programme in July 2019, Pakistan has doubled the policy rate.
The IMF report said that where the policy stance was loose and inflationary pressures persisted, tighter monetary policy should consider to stabilise inflation and inflation expectations like in Egypt, Pakistan, and Tunisia.
The report restated that countries, including Egypt, Pakistan, and Tunisia, should consider implementing a tighter monetary policy in cases where inflationary pressures continue and the stance is loose.
At the start of the policy talks in January this year, the IMF had demanded increasing the the interest rates by at least 6%. At that time, headline inflation was 27.6% and the SBP’s policy rate was 17%.
The IMF’s regional report has also projected a $37.4 billion trade deficit in goods and services in the next fiscal year on the back of $77.3 billion worth of goods. The exports of goods and services are projected at nearly $40 billion for the next fiscal.
But the report does not show any major jump in the gross foreign exchange reserve, projecting it at $11.7 billion or equal to 1.7 months of import cover.
The IMF said that pressures on the exchange rates and international reserves remain significant, with sharp depreciations in Egypt and Pakistan since October 2022.
The regional report has maintained the economic outlook projections made in the World Economic Outlook about Pakistan.
Pakistan’s growth rate is expected to slow materially from 6% in 2022 to 0.5% this year. The IMF said that growth in the region will accelerate to 4.4% in 2024 but it will hover around 3.5% in Pakistan.
In Pakistan, inflation is project to more than double to about 27% this year, reflecting broadening price pressures, according to the new report.
The IMF hope that Pakistan is expect to undertake meaningful fiscal consolidation, including subsidy reforms.
Tighter monetary and fiscal policies are require for macroeconomic stability in Pakistan, and this will consequently weaken the growth prospects.
The global lender marginally lowered its projection for Pakistan’s current account deficit (CAD) for this fiscal year — keeping it at 2.3% of the GDP which appeared unrealistic.
However, it significantly upward adjusted the inflation forecast in line with the prevailing harsh conditions. For the next fiscal year, the deficit has been shown at 2.4% of the GDP.
The regional report reaffirmed that Pakistan will miss the fiscal and debt reduction targets of this fiscal year and the situation will become worse in the next fiscal year with a budget deficit peaking at 8.3% of the size of the nation’s economy.
The report showed that the deficit may widen to as high as 6.8% by June this year. There is a slippage of 2.1% of the GDP or Rs1.8 trillion, underscoring the poor performance of the incumbent government.
The report showed that Pakistan’s revenue-to-GDP ratio may also remain below the levels assessed earlier.
It is now project at 12.2% of the GDP, which should also a matter of concern for the IMF that will also miss its programme targets. For the next fiscal year, the IMF has projected revenues at just 12.5% of the GDP.
Published in the Logical Baat, May 4th, 2023.