Policy Interest Rate Increased By 200 bps

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In the midst of a severe economic crisis, Pakistan’s government has decided to hike the policy rate to 19% or 200 basis points, a 2% rise. It is currently at 17 percent.

The rise is based on the government’s auction rates for domestic debt. This will bring the interest rate down to 19%, just below the previous high of 19.5% established in October 1996.

With the new decision, Pakistan’s government has agreed to another IMF condition for the release of USD 1.1 billion in vital finance as part of the USD 6.5 billion rescue package.

According to Ministry of Finance sources, a technical level conversation had taken place between Islamabad and the IMF review delegation. They stated that it was expected that Islamabad will raise interest rates by 2%.

It was said that the majority of the global money lender’s preconditions had been met and it was also revealed that Pakistan has provided IMF officials with a full briefing on the country’s foreign exchange sources through June.

The appropriate Pakistani officials and IMF employees completed the ninth evaluation of the $6.5 billion rescue plan earlier this month without a staff-level agreement. Nonetheless, both parties agreed on a list of actions that might assist seal the agreement.

The Pakistani authorities had intended to persuade the IMF to impose the criteria gradually, but their dreams were crushed during the IMF mission’s 10-day stay. Pakistan decided to follow the Memorandum of Economic and Financial Policy (MEFP), which included IMF policy recommendations. Authorities were optimistic that a staff-level deal could be achieved soon.

There was a general consensus with regard to permitting the rupee value to be set by the market forces, easing of the limitations on the imports and enabling the previously imported items to be cleared.

According to sources, discussions on several matters concerning the electricity industry were nearing completion, following which the staff-level agreement with the IMF will be achieved.

To facilitate the agreement, the electricity rate was to be raised and additional levies levied. But, due to the severity of the economic situation, any agreed-upon step would be harsh on the vast majority of Pakistanis.

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