Pakistan’s central bank,the state bank of Pakistan (SBP),maintained its key interest rate at 22% on Monday,January 22,2024,a level unseen in four years. The decision comes as the country grapples with economic challenges and seeks to restore investor confidence.
State Bank of Pakistan Monetary Policy
The State Bank of Pakistan (SBP) announced it would hold the policy interest rate steady at 22% on January 22, 2024. This marks the first time the rate has remained unchanged since a series of increases beginning in June 2023.
The SBP cited a decline in inflation as a key factor in its decision, though it cautioned that risks remain. The central bank expects inflation to fall to 5-7% by the end of fiscal year 2024.
Evidence: The SBP’s Monetary Policy Committee (MPC) statement noted, “The MPC observed that the inflation trajectory, as projected, is consistent with achieving the medium-term target of 5-7 percent. However, this outlook is contingent on sustained fiscal discipline, timely completion of the ongoing IMF program, and no further materialization of external shocks.”
Business Reaction to the Rate Hold
Pakistani business leaders had been advocating for a more substantial reduction in interest rates to stimulate economic activity. They expressed disappointment with previous, smaller rate cuts.
During the last rate cut on December 14, 2023, the business community expressed their dismay at the 50 basis point cut. muhammad Arif, President of the Karachi Chamber of Commerce & Industry (KCCI), stated that “such a token adjustment falls far short of what is urgently required to revive Pakistan’s fragile economy and restore business confidence.”
Example: The KCCI specifically called for a reduction of at least 100-150 basis points to provide meaningful relief to businesses facing high borrowing costs.
Pakistan’s Economic context
Pakistan is currently under a $3 billion Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) to avert a default. The program requires Pakistan to implement economic reforms, including fiscal consolidation and increased revenue collection.
Detail: The country faces critically important economic challenges,including high levels of debt,a persistent balance of payments deficit,and declining foreign exchange reserves. Inflation has been a major concern, peaking at over 38% in May 2023, but has since begun to moderate.
Latest Status (as of january 26, 2024): As of January 26, 2024, there have been no significant updates to the SBP’s monetary policy stance or the IMF program. Pakistan is awaiting the next tranche of funding from the IMF, contingent on meeting pre-agreed performance criteria. Reuters reports an IMF mission is expected to arrive next week to review Pakistan’s progress.
