July 29, 2022 (MLN): In order to curb demand and safeguard external stability, the State Bank of Pakistan (SBP) may hike the policy rate by 150-200 basis points (bps) to 16.5-17%, Citigroup forecasted in its latest report.
Since inflation concerns continue to head higher and the latest round of administered price adjustment alongside rising core is expected to lead to headline inflation averaging about 18-20% in FY23 before coming off, the SBP may opt for further tightening.
“Despite the IMF funding, it's not clear to what extent this will be sufficient to fully cover the country's external financing requirements. With a basic balance deficit to the tune of about $11-11.5bn (we estimate a current account deficit of about US$13bn in FY23)- IMF disbursal and some new funding reportedly being unlocked from World Bank, ADB, etc, will help cover part of this,” the report read.
But there is still a lingering gap that will unlikely be filled by capital market access. Thus, for now, IMF may help Pakistan kick the can down the road, but FX pressures may persist unless energy prices collapse.
Though IMF Staff Level Agreement was finally reached, with the program increased and extended marginally, the group expects the staff level agreement to come through after the government unwound energy subsidies with sharp fuel price hikes, plus recent natural gas tariff hikes, and revisions to the originally proposed FY23 budget to add another Rs466bn in tax measures.
Prior to the announcement, SBP had expected the IMF agreement to come “very, very soon”, and the Staff Level agreement confirmed that the government was able to secure a Memorandum of Understanding from the provincial governments to support the consolidated fiscal targets.
“The agreement amounts to about SDR894mn ($1.2bn) in disbursal, which would be higher than the original 7th review amount of SDR687mn but smaller than a combined 7th and 8th review under the original plan, suggesting some spreading out of the remaining loan purchases, with an augmentation of SDR720mn an extension until June 2023, and likely perhaps another 3-4 reviews.” It added.
The group expects that a board approval may come by August, perhaps following prior action related to taxes and the implementation of anti-corruption measures.
However, the resounding victory of the opposition PTI party in the recent election in Punjab could potentially undermine the provincial commitments to the consolidated fiscal targets and increase the onus of the central government to make adjustments in a politically sensitive year, ahead of the 2023 National Election.
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