The State Bank of Pakistan has raised its benchmark interest rate by 100 basis points, to 17%, the highest in more than 24 years, as the country’s economy struggles with inflation, supply shortages, dwindling currency reserves and stalled foreign financing. The move was expected by 25 out of 43 economists surveyed by Bloomberg. The majority of the economists had forecast a hike ranging from 75-200 basis points, while four predicted a hold.
The central bank governor, Jameel Ahmad, explained the decision in a press conference, stating “The inflation pressure persists and on this basis the MPC emphasized to control inflationary pressures.” The country is still recovering from the aftermath of a catastrophic flooding last year that amplified the impact of political turmoil and financial crunch. With foreign currency reserves at a nine-year low and funding, including from the International Monetary Fund, held up, Pakistan was forced to restrict import payments.
As a result, about 6,000 containers of food items, raw materials, and medical equipment are stranded in ports, exacerbating inflation that has lingered above 20% since June. Prices of chicken, eggs, and flour in the country continue to rise, even as global commodity costs have moderated. As the government curtailed overseas purchases, local banks have been refusing to issue letters of credit, leading to a standstill that puts businesses at risk of shutting down.
Inflation may accelerate to 26.6% this month due to supply disruptions, according to Fahad Rauf, head of research at Ismail Iqbal Securities. This would put price gains near a four-decade high of 27.25% seen in August, higher than the central bank’s inflation forecast of 21%-23% that was revised upwards in November. The SBP raised the target rate by a total of 625 basis points in 2022.
Pakistan’s FX reserves were at $4.6 billion as of January 13, equivalent to less than a month’s worth of imports. The central bank chief said last week that the nation will see dollar inflows from the Middle East in the coming days, an assurance that other officials have made in the past months but the money has yet to materialize. A further increase in energy prices looms as part of the IMF conditions for the loan. A widespread power outage on Monday after a grid failure is the latest blow to Pakistan.