Pakistan economic crisis: State Bank of Pakistan hikes policy rate to 20%, highest in 27 years

March 5, 2023

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Pakistan economic crisis: The State Bank of Pakistan (SBP) has hiked the policy by 300 basis points (bps) to 20 per cent, the highest in around 27 years. This is the highest level since October 1996, when the policy rate was hiked to 20 per cent. The State Bank of Pakistan said its decision to hike policy rates “reflects deterioration in inflation outlook and its expectations amid recent external and fiscal adjustments.”

The State Bank of Pakistan (SBP) is the Central Bank of Pakistan. The bank was established on 7 January 1948. The headquarters are located in the financial capital of the country in Karachi.

According to the bank’s Monetary Policy Statement, “The average inflation this year is now expected in the range of 27 – 29 percent against the November 2022 projection of 21 – 23 percent,” which added that the e MPC emphasized that anchoring inflation expectations is critical and warrants a strong policy response.

It further stated that the Monetary Policy Committee (MPC) believes this outlook warrants a strong policy response to manage inflation expectations around the medium target of 5 to 7 per cent. As per the Pakistani central bank, the national CPI inflation surged to 31.5 per cent whereas core inflation rose to 17.1 per cent in urban and 21.5 per cent in the rural basket in February 2023.

According to the SBP press release, the CAD fell to $242 million in January 2023, the lowest level since March 2021. The CAD stood at $3.8 billion in July-January FY23, down 67 per cent compared to the corresponding period last year.

The SBP noted that measures such as hike in GST and excise duties, reduction in subsidies, adjustments in energy prices, and also the austerity measures announced by Prime Minister Shehbaz Sharif will help in tackling fiscal and primary deficits.

It also said that the foreign exchange reserves continue to remain dismally low and that concerted efforts have to be made to shore up the forex reserves. It also commented on how the International Monetary Fund’s (IMF) Extended Fund Facility will help in addressing near-term external challenges.

The bank said the conclusion of the ongoing ninth review under the IMF’s EFF will help address near-term external sector challenges. It also stressed energy conservation to help in alleviating pressure on the external account and meeting import requirements of other sectors.