Pakistan’s central bank brought up the major policy rate to 13.75 percent on Monday, the second increase in less than two months.
“This action, combined with much-needed deficit reduction, should help reasonable demand to a more stable rate while establishing inflationary expectations and containing risks to external stability,” said the State Bank of Pakistan (SBP).
The increase comes as the country struggles with high inflation, declining reserves, and a rapidly weakening currency, which closed the interbank market on Monday 0.39 percent lower at 200.93 against the dollar (54.74 against the UAE dirham). During intraday trade, the local currency surpassed the 201-mark against the greenback but recovered some ground in the final session.
According to the Forex Association of Pakistan, the US dollar was sold at 202.25 in the opening market. Due to the high demand for the greenback, some dealers are selling it at even higher prices.
When compared to the previous fiscal year’s close of Rs157.54, the rupee lost 27.54 percent (or Rs43.39) of its value during the current fiscal year.
Analysts and market insiders are betting that talks with the International Monetary Fund (IMF) in Doha will bring economic and exchange rate stability. The government imposed a ban on the import of luxury and non-essential items last week in order to control rising import bills, the country’s current account deficit, and the decline in the country’s foreign exchange reserves, which fell to around $10 billion on May 13.
“During the fiscal year, 2022-23, the Monetary Policy Committee’s baseline outlook assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies, as well as normalization of the petroleum development levy and GST taxes on fuel.” Under these assumptions, headline inflation is expected to rise temporarily and then stay high for the rest of the fiscal year. By the end of the financial year 2023-24, it is expected to fall to the 5-7 percent target range,” according to the SBP statement.
The rupee has depreciated further, according to the central bank, due to domestic uncertainty as well as the recent strengthening of the US dollar in international markets following Fed tightening.
“After undertaking by 0.9 percent in the fiscal year 2019-20 as a result of Covid, the economy has started to recover even more strongly than expected, growing by 5.7 percent last year and 5.97 percent this year,” the central bank said, citing tentative assessments.
