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Pakistan Economy IMF_Stepping out of the realm of logic (AKD Daily, May 10, 2023)

AKD Daily

 

Pakistan Economy IMF: Stepping out of the realm of logic

 

 

• The IMF’s latest demand is for further interest rate hikes in the country, with some media sources reporting an increase to as much as 25%. The SBP stated that real interest rates, based on FY24 inflation, were finally in the positive region, indicating FY24 avg. CPI inflation of less than ~21%.
• High base established in inflation readings this year sets the stage for inflation tapering off in the latter half of FY24. Consequently, we see inflation next fiscal year to average 20.8%YoY.
• Keeping in mind AKD’s estimates and those referred to by the SBP, raising interest rates to levels that reflect 4-5% spread on inflation, with ongoing economic challenges in the backdrop, would be detrimental to Pakistan’s economy and bring activity in the country to dangerously low levels.
• With cost of borrowing already north of 1/5th of principal amount, servicing debt or taking on new debt for corporations and individuals has become an uphill battle—no longer making fiscal sense. This is also being reflected in the Advances portfolio of leading banks, wherein terminations have been rampant and attracting demand for loans has been a challenge.
• As has been apparent from inflation readings thus far in FY23, heightened interest rates have been unable to transpire the intended effect on inflationary trends. Core inflation has continued to follow an upward trajectory despite cumulative rate hikes of 1,400bps since Sep’21. Hence, it is evident that the cost of heightened interest rates outweigh its benefits.
• On a broader level, heightened interest rates would also be detrimental to fiscal operations of the country, as it increases the cost for the GoP to service sovereign debt.

 

AKD Research