Pakistan’s Interest Rate Surge Shows IMF Deal Not Enough

(Bloomberg) -- Pakistan's trade deficit is at a record, inflation is the fastest in Asia, and its stock market is among the worst in the world, adding pressure on authorities to take steps beyond the recent revival of a $6 billion loan from the International Monetary Fund.

The first signs of concern emerged when the central bank advanced its review meeting last month and raised the key interest rate by a whopping 1.5 percentage points. The decision is pushing traders to pencil in another 1 percentage point jump for when the State Bank of Pakistan next meets Dec. 14, after it promised “measured and gradual” adjustments.

“This is not gradual,” said Ankur Shukla, an economist at Bloomberg Economics. “Given the current set of risks, high interest rates might be justified.”

Prices in the nation rose more than 11% in November and the trade shortfall more than doubled to a record of almost $5 billion, data showed this week, pushing the benchmark stock index down almost 5% on Thursday. The rupee is hovering near an all-time low and the yield on Pakistan's three-month treasury bills jumped 229 basis points to 10.79% at the latest auction on Wednesday.

Still, the government is hopeful that remittances and exports will help shrink the trade gap, Finance Minister Shaukat Tarin said at a news briefing Friday.

There's also lingering uncertainty about the IMF deal, as Pakistan must meet a few conditions including raising taxes and bolstering central bank independence before it wins the next $1 billion disbursal. The “tough” terms will limit any gains in the stock market in 2022 and will fuel debt yields, according to Topline Securities Pvt.

Some respite may come when Saudi Arabia fulfills a plan to deposit $3 billion into Pakistani reserves for one year at a 4% interest rate. The deal was agreed by Prime Minister Imran Khan and is expected to be completed in the coming weeks. Pakistan's foreign-exchange stockpile currently stands at about $16 billion.

Khan's government hopes the inflows will help it boost economic growth to 5% in the year through June 30 from 3.9% in the previous period. Bloomberg Economics last week lowered its prediction to 4.3% from 4.5%. 

Read more: PAKISTAN INSIGHT: Less Policy Support, Slower Recovery in 2022

Until then, the best bet is for the central bank to communicate its outlook clearly, so traders and companies can take steps to protect their businesses, said Suleman Rafiq Maniya, head of advisory at Vector Securities Pvt.

The “market doesn't like these sharp surprises,” he said.

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