Islamabad February 24 2023: State Bank of Pakistan will hike rates by 200 bps to 19 percent at its March meeting, according to report published by Bloomberg.
The State Bank of Pakistan looks set to raise rates further after a 100-basis-point hike — to 17 percent — at its January meeting. The outlook for inflation and falling FX reserves remains troublesome. For starters, authorities’ recent steps — letting the rupee float and hiking fuel prices and electricity tariffs — to meet the terms of IMF aid will stoke price pressures. More taxes could come — if the IMF insists — adding to inflation.
With IMF aid unlikely to arrive before end-March — assuming current negotiations are successful — FX reserves will remain strained. We expect the SBP to hike rates by 200 bps to 19 percent at its March meeting. A further drop in import demand due to higher rates will support FX reserves until the aid arrives. Further ahead, the SBP will likely stay on hold through June.
The government aims to cut its budget deficit to 4.9 percent of GDP in fiscal 2023 from 7.9 percent in fiscal 2022. With the 1H gap unchanged from a year earlier at 2percent of GDP, a lot of headway must be made in 2H. The government has made a start – new taxes will net 170 billion rupees in 2H. Increases in levies on gasoline and diesel and charges for power and gas will also help.
But the risk of revenue shortfalls – putting the budget deficit target out of reach – is substantial. The economy’s slump could push sales-tax collections below projections. Lower gasoline sales could hit revenue from the fuel levies. What’s more, a further rise in interest rates could push debt-servicing costs above estimates. This suggests more belt-tightening will be required.
More aid delays from the International Monetary Fund have put Pakistan in a nerve-racking place. The government was expecting the IMF to decide on loans by Feb. 9, but the lender’s team came and left without an agreement. Pakistan has been waiting for help since November, when the IMF skipped planned meetings. It’s unclear whether the foot-dragging means aid is in trouble. But time is ticking and Pakistan is moving closer to default.
The rupee tumbled about 10percent the day after Pakistan abandoned currency controls on Jan. 26. Our estimate of fair value suggests it should fall a little more – but fear that the International Monetary Fund will withhold aid again could cause a bigger drop in the short-term. Bloomberg expects Pakistani Rupee fair value is 266, but overshoot likely.
