Further hike in interest rate by the central bank could prove suicidal for Pakistan

State Bank of Pakistan (SBP) is scheduled to announce a key monetary policy decision on May 23, 2022. The analysts and market participants keenly await SBP policy direction given Pakistan's economic uncertainty.

The consensus is growing in Pakistan that further hike in interest could prove suicidal for the country. The debt servicing by the Government of Pakistan (GoP) has become unsustainable. On top of that any hike in cost of doing business will dampen prospects of boosting exports. Let everyone remember that Pakistan suffers from cost-pushed inflation.

Since the last Monetary Policy announcement on April 07, 2022, secondary market rates including T-Bill/Kibor rates have gone up by around 200bps due to uncertainty about continuation of IMF program and removal of subsidies on petrol and diesel. 

It will also be interesting to see SBP’s stance as this will be the first monetary policy statement after the recent change in the government and appointment of Dr. Murtaza Syed as acting Governor of the central bank.

The most recent T-Bill auction tell a different story, the cut off yields declined for the first time after almost a year, down by 5nbs to 29bps with 3/6/12 months T-Bill yields clocking in at 14.49%, 14.70%, and 14.75% respectively.

For further clues let us go through some details of a survey conducted by Pakistan’s leading brokerage house, Topline Securities. Questions were asked on interest rate, inflation, currency, GDP growth and current account deficit outlook.

As per the survey results, around 54% of the participants expects an increase of 100bps, 14% of the participants anticipate an increase of 150bps and 11% expect an increase of 200bps or more. As against this 13% participants expect increase of 50bps and 9% expect no change.

Participants remained divided on policy rate expectations by end of FY23. 27% of the participants expect policy rate to close at 13% by end of next financial year. 41% of the participants expect it to above 13% while 32% anticipate it to be below 13%.

In terms of currency outlook, 39% of the participants expect PKR/USD to close above 205 by the end of next financial year. 9% believe it will remain in the range of 200-205 by FY23 end. 23% expect it to close in between 195 to 200 while the remaining anticipates it to be below Rs195.

27% of the participants are expecting inflation of 13-14% in FY23, 16% expect it to be between 14 to 15 percent, 4% anticipate it to be above 15%. The remainder of the respondents is eyeing an inflation of lower than 13% in FY23.

In terms of GDP growth, 7% of the participants think that GDP growth will be below 3% and 32% of them expects it to be between 3-3.5%, whereas 23% of the participants project it to be 3.5%-4.0%. The remainder of them anticipates it to be above 4%. 

Participants remained divided on the expectations of current account deficit forecast for FY23 as 46% participants expect current account deficit to be in the range of US$12 billion to US$15 billion while 18% participants anticipate it to above US$15 billion. The remainder of them expects it to be below US$12 billion.  

Pakistan is currently facing tough economic times as depleting foreign exchange reserves, rising fiscal deficit amid huge petrol/diesel subsidy and indecisiveness by the new government on key economic measures is exacerbating economic issues.

It will key for government to take the required reform steps including removal of subsidy on petrol/diesel, measures to curb imports and improve tax collection. This will pave way for the resumption of IMF program which currently remain stalled and will result in dollar flows that could ease pressure on currency and foreign exchange reserves going forward.

Given concerns highlighted above along with rising inflation and weakening currency, analysts anticipate SBP to raise the policy rate by 100bps.