IMF Urges Pakistan to Continue Monetary Policy Tightening Cycle
KARACHI: The International Monetary Fund (IMF) stated in a staff report on Tuesday that Pakistan must continue its cycle of monetary tightening, a week after the lender approved a new bailout agreement and less than two weeks before the country’s central bank holds its next policy meeting.
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“The recent policy rate hike is welcome, but the tightening cycle should continue if needed to reduce inflation and facilitate external rebalancing,” the staff report stated.
A day after the country updated its fiscal year budget, Pakistan’s central bank convened an emergency meeting last month to comply with IMF demands and get a delayed tranche from the Extended Fund Facility (EFF), which is now closed. Instead, Pakistan was able to get a standby agreement worth $3 billion as a lifeline.
Since April 2022, the State Bank of Pakistan (SBP) has increased its key policy rate by 12.25 percentage points, mostly to combat the inflationary spiral. The following monetary policy discussion is slated for July 31.
The staff report also stated that in order to re-anchor expectations and meet the SBP’s inflation target over the medium term, the forward-looking real policy rate should return to positive territory in the near future.
Pakistan stated that it is prepared to explore more action at the following monetary policy committee meeting and subsequent ones until inflation and inflation expectations are on a clear downward path in the Memorandum of Economic and Financial Policies (MEFP) that was produced as a result of its discussions with the IMF.
It further stated that the precise rate of future adjustments depends on information on inflation, changes in currency rates, the strength of the external position, and the balance between fiscal and monetary policy.
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“To this end, we will aim to ensure that the real policy rate returns to positive territory on a forward-looking basis to signal our commitment to bring inflation within the target band within FY26,” the MEFP stated.
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