The State Bank of Pakistan has held its key interest rate steady at 22%, in light of an upcoming review by the International Monetary Fund (IMF) of a $3 billion bailout program. This decision comes despite a significant surge in inflation, which reached 31.4% in September due to a record fuel price hike. However, the bank anticipates that inflation will average between 20% and 22% this fiscal year, marking a decrease from last year’s 29.2%.
The key interest rate has remained unchanged since it was increased to 22% in April 2022, demonstrating the aggressive monetary policy stance suggested by the IMF. This approach appears to have had some positive effects, as a crackdown on black market trading has notably improved the value of the Pakistani currency against the dollar.
Moody’s (NYSE:) has issued a warning about potential defaults if IMF bailout loans are not secured. Earlier this year, Pakistan narrowly avoided default by securing a new deal that replaced an incomplete and stalled IMF program.
In addition to the IMF bailout, Pakistan is also relying on investments from Middle Eastern allies such as Saudi Arabia and the United Arab Emirates, as well as funds from bilateral and multilateral donors for post-2022 flood reconstruction. These sources of funding are crucial for the country to meet payments due this financial year.
The IMF’s forecasted inflation rate stands at 25.9%, indicating a challenging economic environment for Pakistan. The upcoming review of the $3 billion bailout program will be instrumental in determining the country’s financial future.
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