© Reuters. FILE PHOTO: An image of the State Bank of Pakistan (SBP) emblem on a reception desk at the main office in Karachi, Pakistan, July 16, 2019. REUTERS/Akhtar Soomro/File Photo
By Syed Reza Hassan
KARACHI, Pakistan (Reuters) – Pakistan’s central bank kept its key interest rate at 15 percent on Monday, days after it downgraded the South Asian nation’s credit rating in the face of an economic meltdown exacerbated by devastating floods.
Pakistan is going through a balance of payments crisis, as foreign exchange reserves have fallen to almost one month’s worth of imports, a situation exacerbated by currency devaluation and a 27% rise in consumer prices.
Moody’s (NYSE:) cut Pakistan’s sovereign credit rating on Thursday by one notch to Caa1 from B3, citing increased government liquidity and external vulnerability risks.
“Based on the information currently available, the Monetary Policy Committee (MPC) is of the opinion that the current monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods,” the central bank said in a statement.
She said inflation may rise and growth prospects have weakened.
It was the central bank’s first policy decision since this summer’s floods killed more than 1,700 and caused an estimated $30 billion in losses.
The central bank statement said GDP growth could drop to around 2% in the 2023 fiscal year compared to a previous forecast of 3%-4% before the floods.
Initial budget estimates for the 2023 fiscal year ending in June were 5% growth, which the World Bank also said is now expected to be around 2%.
Pakistan’s economy grew more than expected in the last fiscal year, by 6%.
However, the central bank later said the economy was facing significant imbalances including a large current account deficit and persistently high inflation.
The downgrade of Pakistan’s credit rating raised fears that the country could default on its sovereign debt obligations after Prime Minister Shahbaz Sharif sought to forgive a Paris Club loan last month.
Finance Minister Ishaq Dar said on Sunday that there would be no demand for debt restructuring and that Pakistan would honor all commitments.
Inflation vs. policy rate
The central bank expected post-flood inflation to be on the higher side compared to the last estimate between 18%-20% in the 2022-23 fiscal year.
With consumer prices rising more than 25% in the first quarter of 2022-23, real interest rates remain deep in negative territory.
Higher food prices may raise the core inflation rate, the bank said, adding that the impact on the current account deficit is likely to be mild.
It said it would leave the current account deficit close to the previous forecast of 3% of GDP.
Prior to May, when annual inflation exceeded 21%, the State Bank of Pakistan sought to keep real interest rates slightly positive. It has raised the official price by 800 points since September 2021.
Imports hit a record and outpaced export growth, sending Pakistan’s current account deficit to more than $17 billion – nearly 5% of GDP and six times higher than 2020-2021 – driven mainly by high energy bills.
The International Monetary Fund (IMF) has welcomed efforts to cool the overheating economy, contain the current account deficit, and introduce economic reforms, setting such changes as a precondition for a financial bailout.
Originally published at San Jose News Bulletin
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