© Reuters. FILE PHOTO: The State Bank of Pakistan (SBP) logo is printed on the reception desk at its headquarters in Karachi, Pakistan July 16, 2019. REUTERS/Akhtar Soomro/File Photo
By Syed Raza Hassan
KARACHI, Pakistan (Reuters) – Pakistan’s central bank left its key policy rate unchanged at 15% on Monday, days after the South Asian nation’s credit rating was downgraded amid a recession. economy aggravated by devastating floods.
Pakistan is in the midst of a balance of payments crisis, with foreign exchange reserves falling to less than a month’s worth of imports, exacerbated by a depreciating currency and a 27% increase in consumer prices.
Moody’s (NYSE:) downgraded Pakistan’s sovereign credit rating on Thursday one notch to Caa1 from B3, citing increased government liquidity and external vulnerability risks.
“Based on the available information, the MPC (Monetary Policy Committee) believes that the current monetary policy stance strikes an appropriate balance between managing inflation and sustaining growth in the face of floods.” flood,” the central bank said in a statement.
It said inflation could move higher and growth prospects have weakened.
It is the central bank’s first policy decision since floods this summer killed more than 1,700 people and caused an estimated $30 billion in damage.
The central bank said GDP growth could slow to around 2% in fiscal year 2023 from a previous forecast of 3%-4% before the floods.
The original budget estimate for FY2023 ending in June was for 5% growth, which the World Bank also says is now expected to be around 2%.
Pakistan’s economy grew more than expected in the last financial year, at 6%.
However, the central bank later said the economy faced significant imbalances including a large current account deficit and persistently high inflation.
The downgrade of Pakistan’s credit rating raised concerns that the country could default on its sovereign debt commitments after Prime Minister Shehbaz Sharif sought loans from the Paris Club last month.
Finance Minister Ishaq Dar on Sunday said there would be no debt restructuring request and Pakistan would honor all commitments.
INFLATION VS RATE POLICY
The central bank forecasts post-flood inflation to be higher than the last estimate of 18%-20% in fiscal year 2022-23.
With consumer goods prices rising by more than 25% in the first quarter of 2022-23, real interest rates remain deeply in negative territory.
The bank said higher food prices could boost average inflation, adding that the impact on the current account deficit may have been softened.
It said it would keep the current account deficit close to the previously forecast 3% of GDP.
Before May, when annual inflation breached 21%, the State Bank of Pakistan managed to keep real interest rates slightly positive. It has raised the official rate by 800 points since September 2021.
Imports hit a record high and outpaced export growth, driving Pakistan’s current account deficit to more than $17 billion – nearly 5% of GDP and more than six times higher than between 2020-21 – boosted. driven mainly by higher energy bills.
Efforts to cool an overheated growing economy, contain a current account deficit and introduce economic reforms have been welcomed by the International Monetary Fund (IMF), which has placed change as a precondition for a bailout.
