Washington DC July 18 2023: IMF in its staff report emphasized that the SBP will need to continue its tightening cycle to re-anchor expectations given that inflationary pressures are expected to persist over the coming year, including because the impact of exchange rate corrections will continue to reverberate through the economy.
IMF states that the latest policy rate move of 100 basis points hike to 22 percent from the SBP is a welcome step, the authorities have generally been sanguine about inflationary pressures quickly receding and returning to their 5–7 percent inflation target range by end-FY25.
The SBP agreed with fund to maintain a tight monetary policy stance, higher rates and prudent use of liquidity injection as needed, given incoming data, to achieve real positive interest rates, on a forwardlooking basis, and place inflation and inflation expectations on a clear downward path. At the same time, improving the monetary transmission and the monetary operation framework will be important. The SBP is also committed to not introduce new refinancing schemes and to keep the outstanding credit of the refinancing facilities below their current limits.
Reducing external imbalances and rebuilding reserves requires permanently ending administrative controls and actions to manage the current account and returning to a marketdetermined exchange rate.
The reliance on administrative measures to manage imports since May 2022 and the tightly controlled exchange rate since September 2022 have caused significant damage to growth and exacerbated external pressures by dissuading inflows, especially remittances. These interventions have undermined public trust in the exchange rate system and, going forward, it will be necessary to ensure that the exchange rate will be market determined, allowed to act as a shock absorber, and free from formal or informal guidance or restrictions. Staff also recommended unwinding the January 2022 shortening of the period for repatriation of export proceeds as macroeconomic and BOP stability is restored.
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