Inflation Considerations and Expert Opinions
Ali Farid Khwaja, co-founder of KTrade, argued against a rate cut, suggesting it would send the wrong signals to the IMF and indicate a lack of commitment in controlling inflation.
In contrast, Sami Tariq, head of research at Pak Kuwait Investment Company, expected a 50 bps cut, citing positive real interest rates on a forward-looking basis.
Prior to the IMF bailout, Pakistan had to implement various measures, including revising its budget, increasing the benchmark interest rate, and raising electricity and natural gas prices.
The policy rate was increased in June as part of a reform program aimed at stabilizing the economy.
The IMF also mandated Pakistan to raise $1.34 billion in new taxes to fulfill fiscal adjustments, contributing to record-high inflation of 38% YoY in May.
IMF Measures and Business Sentiment
The IMF-required measures have had a dampening effect on business sentiment, with businesses now advocating for a rate cut.
However, economic analyst and journalist Khurram Husain argued against such a move, emphasizing its lack of justification and the IMF’s cautionary stance.
Nevertheless, some relief may be on the horizon if inflation continues to decrease as expected.
The Institute of International Finance (IIF) projected a gradual decline in inflation to an average of 24% in the current fiscal year and 14% in fiscal year 2024/25, although a depreciating rupee, rising energy prices, and increased taxes may offset gains from falling commodity prices.
The rates decision will be the last under caretaker Prime Minister Anwaar ul Haq Kakar, as the country is scheduled to hold elections on Feb. 8.
While caretaker governments traditionally oversee elections, recent legislation has granted Kakar’s government more authority to make policy decisions regarding economic matters.
Analysts, however, maintain that the central bank operates independently.
This legislation aims to ensure compliance with the conditions set by the June bailout agreement.