IMF approves central bank’s decision to keep policy rate unchanged

KARACHI: The International Monetary Fund (IMF) has given its stamp of approval to the decision by the State Bank of Pakistan (SBP) to maintain the interest rate unchanged, despite a notable slowdown in inflation.

According to the IMF-Pakistan Stand-by Arrangement (SBA) – 2nd and Final Review – Country Report, the IMF has signalled its support for the SBP’s stance on interest rates. “The IMF staff endorsed the SBP’s Monetary Policy Committee decision to maintain the policy rate,” the report said.

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The issue has been garnering criticism from stakeholders who advocate for a reduction amid declining inflation. The primary contention arises from the widening gap between the current 22 per cent interest rate and the projected 13 to 15 per cent Consumer Price Index (CPI) for May.

Although the predicted inflation by market analysts and research firms suggest room for interest rate adjustment, the IMF’s backing of the SBP’s decision implies a likelihood of stability, even with an anticipated 7 to 9 per cent gap between inflation and the policy rate.

The IMF report emphasised that any deviation from the current policy stance should be supported by evidence of declining inflation, controlled pass-through effects, and limited exchange rate pressures resulting from forex market normalization, a news report by Dawn said on Sunday.

Moreover, it highlighted the importance of Pakistan’s commitment to a flexible exchange rate and transparent interbank foreign exchange (FX) market. The IMF recommended the continued proactive accumulation of reserves through interbank purchases, commending the reduction of the SBP’s swap/forward position for alleviating forward premia compression.

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However, the IMF also cautioned against expectations of continued rupee stability in the future. Additionally, it stressed the necessity of reforms in the power sector to ensure sustainability, including cost-side reforms, improvement of transmission and distribution infrastructure, and the privatisation or long-term management concession of power distribution companies (DISCOs) performance.

Other measures include transitioning captive demand to the national grid, reevaluating Power Purchase Agreement (PPA) terms, and converting Power Holding Private Ltd debt into cheaper public debt.