The State Bank of Pakistan (SBP) on Monday announced its monetary policy, increasing its benchmark interest rate by 150 basis points (bps) from 10.75% to 12.25%, effective from May 21. The new rate will prevail for the next two months.
The bank’s estimates showed that economic growth was expected to be slow in Fiscal Year 19 but rise modestly in Fiscal Year 20. However, some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported program.
The State Bank mentioned three significant developments since the last Monetary Policy Committee (MPC) meeting held in March 2019.
1. The IMF’s 39 months long loan arrangement worth 6 billion USD. The arrangement is expected to support economic growth while stabilizing the macroeconomy.
2. To counter the increasing fiscal deficit in the first nine months of FY 2019, significant reliance on Central Bank financing of the shortfall has mitigated the impact of previous monetary tightening.
3. Depreciation of Pakistani rupee since the last MPC, which shows a combination of underlying macroeconomic factors and market sentiment considerations.
The government borrowed Rs 4.8 trillion from SBP during o1 Jul to 10 May FY19, which is 2.4 times the borrowing during the same period last year. A major chunk of this borrowing (Rs 3.7 trillion) reflects a shift away from commercial banks which were reluctant to lend to the government at prevailing rates. Consumer Price Index (CPI) also increased on average by 7% in July to April FY 2019, while preceding increment was 3.8%.
A higher benchmark interest rate means that commercial banks will also increase their interest rates, making it more expensive to borrow or take loans. That’s for individuals (like people wanting loans to buy a car or a house) and businesses (who take loans to expand their companies or buy more machinery). With the revised rates, it is creating a close to hopeless situation for the “Start-Ups”, which are seeking bank financing, to start establishing their business while earning minimal profits or even hitting the break-even.
