Pakistan economic crisis: State Bank of Pakistan may hike rates by 200 bps

KEY HIGHLIGHTS:

• Pakistan's central bank might hike rate by 200 bps
• Pakistan govt raised $991.54 mn on Wednesday
• The country is looking to receive a loan from IMF

Pakistan’s central bank, State Bank of Pakistan, is set to raise interest rates in an off-cycle review this week. The rate hike is expected to be as much as 200 basis points. The current rate stands at 17 per cent. The neighbouring country is in the grasp of a financial crisis and is looking to recover with the help of a $1 billion loan from the International Monetary Fund (IMF). 

Market participants in a recent treasury bill auction are expecting at least a 200 basis point increase in the central bank’s policy rate, as per a Reuters report. The expected increase is based on the rates the Pakistan government set in the auction to raise domestic debt. 

The Pakistani government raised $991.54 million in the auction on Wednesday. The cut-off rates for the three-month, six-month, and 12-month tenors jumped 195 bps, 206 bps, and 184 bps higher than the previous auction.

Pakistan is undertaking several measures to secure the IMF funding, including raising taxes, removing subsidies and artificial curbs on the exchange rate. IMF’s resident representative in Pakistan Esther Perez Ruiz said that the organisation supports the use of monetary policy to rein in inflation. 

While off-cycle rate reviews are not uncommon in Pakistan, the next meeting is scheduled for March 16. 

PAKISTAN ECONOMIC CRISIS

Pakistan’s economic crisis has now hit the army as well. The Pakistan Army is reportedly facing a food shortage in messes due to cuts in supply. Some field commanders have written to the Quarter Master General (QMG) Office, according to media reports. According to reports, the army was not able to feed soldiers 'two times properly' amid decades-high inflation and cuts in special funds. 

Pakistan Prime Minister Shehbaz Sharif has also asked the foreign affairs ministry to cut the number of foreign missions, and reduce offices and staff, amid its implementation of austerity measures. Pakistan may also cap discretionary grants, and secret service funds of the Inter-Services Intelligence (ISI) and Intelligence Bureau (IB). Austerity measures could also include cuts in the budget of all government entities and withdrawal of certain perks and privileges of Cabinet members, parliamentarians, and government servants, including luxury vehicles and security/protocol.

(With Reuters inputs)

Also read: Pakistan may slash ISI's budget as default crisis deepens

Also read: 'Not able to feed soldiers': Now, Pakistan's economic crisis hits army