ISLAMABAD: The International Monetary Fund (IMF) has slammed the State Bank of Pakistan (SBP) for failing to respond to inflationary pressures through timely tightening of monetary policy from 2020 onwards.
“Monetary policy fell behind the curve, as price pressures dampened expectations of five decades of high inflation,” the IMF said in its staff report after approving a $3 billion standby arrangement program for Pakistan. “.
“Several pauses in the policy rate tightening cycle and a dramatic increase in the size of the State Bank’s open market operations (OMOs) to maintain the policy rate in its corridor resulted in an easing of monetary policy conditions, a At a time when inflation was already rising.”
Inflation expectations have become erratic, with more than 90% of consumers expecting higher prices over the next six months in the State Bank’s May survey, the IMF report said.
The Monetary Policy Committee on June 26 hiked the policy rate by 100 bps to 22 percent, while at the same time, interest rates on its two main refinancing schemes (EFS and LTFF) were hiked by the same amount. The difference with the policy was maintained. rate at three percentage points.
“Monetary policy needs to be tight, proactive and data-driven. The recent hike in policy rates is welcome, but tightening should continue if needed to moderate inflation and ease external balances.” ” the IMF added, indicating the need for more policy rate hikes in the coming months.
The IMF added that in the short term, the forward-looking real policy rate should return to positive territory to re-anchor expectations and achieve the SBP’s inflation objective over the medium term.
Implementation of the plan to phase out refinancing schemes will strengthen the monetary policy process and bring transparency to these schemes. He said that what is important is that the independence of the State Bank should be strengthened and protected.
A tight monetary policy stance is important to reduce inflation, re-anchor expectations and support external sector balance through the exchange rate.
The IMF said that while the latest policy rate move by the State Bank is a welcome step, authorities generally expect inflationary pressures to ease sharply and inflation to reach its 5-7 percent target by the end of FY25. Worries about the currency returning to the target range.
The staff stressed that the SBP will need to continue its tightening cycle to re-anchor expectations, as inflationary pressures are expected to persist over the coming year, including as rates rise. The effects of exchange rate reforms will continue to reverberate through the economy.
The SBP agreed to maintain a tight monetary policy stance — higher rates and prudent use of liquidity injections — as needed, given the data ahead, to achieve real positive interest rates, a future basis. On, and keep inflation and inflation expectations in a clear place way down.
Also, improving the monetary transmission and monetary operation framework will be important. The State Bank is also committed not to introduce new refinancing schemes and to keep the outstanding credit of refinancing facilities below its current limit.
Headline inflation is expected to ease after June, the IMF said, after nearly two years of steadily rising inflation, driven by the core effects of higher fuel and electricity prices last year and a lower contribution from food.
But price pressures are likely to remain high, including as a result of much delayed fiscal tightening; As such, average headline inflation is expected to remain above 25 percent in FY24, with end-of-period inflation falling below 20 percent only in FY24.
Similarly, core inflation is set to ease very gradually in FY24 due to higher inflation expectations and the necessary tightening of delayed policies.
Headline inflation will continue to decline in FY25, with EOP inflation only falling to single digits in mid-FY26.
Inflation has risen steadily over the past six months, partly due to rising food prices and passing through depreciation, but the aforementioned shortages have put upward pressure on prices.
With core inflation reaching 22.8% (YoY) and headline inflation reaching 38% in May 2023, price dynamics have become increasingly broad-based, a record high, particularly affecting low-income earners. Damaged.
Despite mounting pressure, the SBP’s actions lacked clarity, as it kept its policy rate unchanged at the MPC meetings in August, October and early June, anticipating that rate hikes were on the rise. and will decrease, but rates are increased in November, March, April, and late June.
The latest hike brought the policy rate to a total of 22%, an increase of 825 bps (basis points) since the start of FY23.
