IMF urges SBP to stay hawkish

May 15, 2026 (MLN): The International Monetary Fund (IMF) has urged Pakistan to maintain an “appropriately tight” monetary policy stance and remain ready to raise interest rates again if inflationary pressures intensify amid rising global commodity prices and ongoing geopolitical tensions in the Middle East.

In its latest staff report released after the completion of the third review under the Extended Fund Facility (EFF), the IMF said the State Bank of Pakistan’s (SBP) monetary policy had helped contain inflation and stabilize expectations.

IMF also warned that higher energy and food prices could trigger renewed price pressures in the coming months.

The Fund noted that after easing inflation during the first half of FY26, the SBP cut the policy rate by 50 basis points in December and kept it unchanged at 10.5% during its January and March meetings following the outbreak of the Middle East conflict.

However, the IMF cautioned that the central bank should continue to “carefully monitor and assess” the pass-through of higher international commodity prices into domestic inflation, wages, and inflation expectations.

It added that the SBP should stand ready to tighten policy further if needed to keep inflation anchored around its target.

According to the report, headline inflation rose to 7.3% year-on-year in March 2026 as higher commodity prices started feeding into domestic energy prices, while core inflation remained relatively contained at around 7.6%.

The IMF projected Pakistan’s average inflation at 7.2% in FY26 and 8.4% in FY27 before easing back into the SBP’s target range by FY28.

The Washington-based lender also emphasized that exchange rate flexibility should remain the economy’s primary shock absorber as Pakistan continues rebuilding foreign exchange reserves.

The IMF said the SBP’s efforts to accumulate reserves had improved external buffers, but reserve levels still remained below adequate benchmarks.

The report highlighted that Pakistan’s gross foreign exchange reserves reached $16 billion by end-December 2025, supported by SBP foreign exchange purchases, while the rupee remained broadly stable near Rs280 per dollar.

The IMF further recommended continued reforms to deepen and gradually liberalize the foreign exchange market, including improving cross-border payment infrastructure and preparing a phased roadmap for FX market liberalization.

On the banking sector, the Fund said Pakistan’s financial system remained liquid and profitable, though it warned that high exposure of banks to government securities posed financial stability risks.

The IMF also flagged persistent undercapitalization in the microfinance banking sector and urged the SBP to take decisive steps to address capital shortfalls.

The report came as Pakistan navigates the economic fallout from elevated global energy prices and uncertainty stemming from the Middle East war, which the IMF expects will slow growth and push inflation higher over the near term.

Copyright Mettis Link News