IMF demands big rate increase

The International Monetary Fund (IMF) has demanded an upfront big increase in interest rate, which can push the key rate to a new high, aimed at giving a strong signal of economic stabilisation policies and curbing higher inflationary expectations

Sources told The Express Tribune on Monday that the IMF had initially demanded a significant increase in interest rate during the recently concluded staff-level visit

Though the central bank did not come up with a final number, the IMF pressed for an aggressive approach, they added

Sources said that the central bank was trying to convince the IMF to agree on a lower rate, but no rate could be finalised between both sides

The central bank has to decide soon to address one of the outstanding issues for early finalisation of a staff-level agreement

If the IMF’s demand is accepted, this will push the interest rate to the highest level of around 20%, breaking the previous record of 19

5% in October 1996

At the beginning of the IMF programme, the policy rate stood at 10

75%, which might almost double if Pakistan took an aggressive policy stance, sources said

The central bank was resisting the IMF’s demand to increase the rate before the next Monetary Policy Committee (MPC) meeting

“MPC meeting is due on March 16, which may be too far given the urgency to clinch the staff-level agreement with the lender,” said an official privy to the discussions

At the same time, the central bank does not want to give an impression that the MPC is being dictated by the IMF, particularly when the global lender is against the federal government’s intervention in the State Bank of Pakistan’s (SBP) affairs

The SBP spokesman’s reply to the question of whether there was a possibility of calling a special MPC meeting, was awaited till the filing of this story

The Ministry of Finance informed the IMF that the inflation rate could hit 29% after an increase in electricity prices

Just eight months ago, the ministry had projected 11% inflation while the central bank forecast an 18-20% reading

Sources said that during the recently held talks, the IMF argued that the central bank’s monetary stance was not appropriate and it needed to adopt a more aggressive approach to give a clear signal to the markets

The sharp increase in the interest rate will also give a signal of the inflationary direction besides curbing expectations

The IMF’s stance was that a gradual approach to increase the rate had not helped so far, therefore, the central bank should adopt a more aggressive stance, they added

However, the central bank resisted the demand for a big and sudden increase on the grounds that inflation had mostly been caused by the administrative decisions like increase in prices of various utilities and currency devaluation

They said that the central bank’s negotiators were of the view that the national output was already negative and there was no significant room to curb demand

A significant increase in the interest rate coupled with a surge in taxes, electricity and gas prices will not only slow down economic growth, but will also cause unbearable hardships to the people

Although the recent rate hikes have not helped contain inflation, they have contributed to a further increase in the debt servicing cost to Rs5

2 trillion in the current fiscal year, which was 52% of the overall budget

The IMF also sees the interest rate as a tool to build the foreign exchange reserves, as a higher global interest rate environment has led to the withdrawal of portfolio investments from developing countries like Pakistan

There was another issue of whether the central bank should target the core inflation or the headline inflation, while determining the policy rate

Earlier, the Dr Reza Baqir-led central bank had agreed to link the rate with the headline inflation

The headline inflation in January hit a 48-year high of 27


But core inflation in rural areas was 19

4% while in urban areas it was 15


During the recent talks, the IMF asked Pakistan Bureau of Statistics (PBS) about its inability to give a national core inflation number

The chief statistician briefed the IMF that in case of a national CPI number, the groups of both CPI urban and CPI rural were the same, which were easily aggregated and combined

However, in case of core rural and core urban inflation, the same could not be done owing to the difference in the groups

In its last MPC meeting, the central bank raised the interest rate by 1% to 17%

The committee noted that inflationary pressures had persisted and continued to be broad-based

The combined last review report of the IMF had emphasised on implementing a positive real interest rate policy

“A tight monetary policy stance is critical to reduce inflation and re-anchor expectations

The SBP will need to remain vigilant and ready to continue the tightening cycle as inflationary pressures are expected to continue over the coming year, placing further stress on expectations,” said the eighth review report

Published in The Express Tribune, February 14th, 2023

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Date:15-Feb-2023 Reference:View Original Link