Pakistan secures $4bn additional pledges: SBP governor

KARACHI: The State Bank of Pakistan left its benchmark interest rate unchanged for a second straight meeting on Monday, as expected, to support an economy facing challenges made worse by devastating floods.

The SBP’s Monetary Policy Committee maintained the policy rate at 15 percent. In its last monetary policy, the SBP said it would pause while it evaluated the effects of the government’s and its monetary and fiscal tightening measures. At that time, it further emphasised that data-driven policy decisions will be made in future.

The economic activity has slowed down with inflation and the current account deficit has been falling since the last monetary policy was announced in August. “Based on currently available information, the MPC was of the view that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods,” the SBP said in a monetary policy statement.

“On the one hand, inflation could be higher and more persistent due to the supply shock to food prices, and it is important to ensure that this additional impetus does not spill over into broader prices in the economy,” it said.

“On the other, growth prospects have weakened which should reduce demand-side pressures and suppress underlying inflation. In light of these offsetting considerations, the MPC considered it prudent to leave monetary policy settings unchanged at this stage,” it added.

The SBP has hiked the policy rate by a total of 525 basis points (bps) since the year’s beginning to fight the spiraling inflation and reduce the higher current account deficit. It raised interest rates by 800 basis points in the fiscal year 2021/22.

The central bank has lowered its gross domestic product growth estimate for this fiscal year to 2 percent from the prior forecast of 3-4 percent. It expects higher food prices could raise average headline inflation in FY2023 above the pre-flood projection of 18-20 percent. However, inflation is forecast to fall in the range of 5-7 percent in the next fiscal year.

The SBP maintained its current account deficit forecast of around 3 percent of GDP in FY2023. “The impact on the current account deficit is likely to be muted, with pressures from higher food and cotton imports and lower textile exports largely offset by slower domestic demand and lower global commodity prices,” it said.

With secured external financing and additional commitments in the wake of floods, the SBP anticipates that the foreign exchange reserves of the country will improve. Pakistan has made a $4 billion debt repayment in the first quarter of FY2023 with another $600 million payments made in the first 10 days of October. Therefore, the country is meeting all its commitments and there should not be any question on meeting any future debt obligation, said Ismail Iqbal Securities, citing a post-monetary policy analysts briefing given by the SBP Governor Jameel Ahmad.

Post-flood Pakistan has been able to secure additional commitments of $4 billion. Of these commitments, $1.5 billion is going to come from the Asian Development Bank, $0.5 billion from the Asian Infrastructure Investment Bank, and $1-$2 billion is expected from the World Bank, the governor added. The ADB board will meet on October 25 to approve a $1.5 billion payment to Pakistan, according to the SBP.

Apprising on the IMF programme, the SBP informed that it was on track and had fully complied with the (September 2022-end) targets assigned to it and was hopeful of a positive outcome with a reconsideration of conditions post-flood in the next review.

On plans to buy back Eurobonds maturing in December 2022, the SBP said no decision had been taken in this regard as such and any decision taken will be in coordination with the government.