Pakistan’s central bank increased its key rate for a second straight meeting as economic pressures build ahead of a tense national vote.
The target policy rate was raised to 7.5 percent from 6.5 percent, State Bank of Pakistan Governor Tariq Bajwa said in a Karachi briefing. The increase by 100 basis points was predicted by nine economists in a Bloomberg survey with 12 expecting a hike of lower or higher magnitude. It’s the biggest move since November 2008 when the previous benchmark discount rate rose by two percent, according to data compiled by Bloomberg.
With elections scheduled for July 25, there’s growing speculation that Pakistan will have to seek IMF support as its current-account deficit widens and foreign reserves dwindle. A caretaker administration in Islamabad has ruled out filing a formal request with the Washington-based lender and after July 25 a new government will need to approach the IMF as a “matter of urgency,” according to Bilal Khan, a senior economist at Standard Chartered Bank Plc.
“The current-account deficit is getting worse,” Bajwa said. “We want to suppress aggregate demand.”
South Asia’s second-largest economy is showing stress signals with its currency dropping 15 percent since December in three devaluations to make it the worst performer in Asia. Pakistan’s economy faces “some very daunting challenges,” according to Finance Minister Shamshad Akhtar. Consumer prices rose 5.2 percent in June, the fastest pace since Jan. 2016, according to data compiled by Bloomberg.
The nation’s current-account gap widened by 45 percent to $16 billion in eleven months and foreign-exchange reserves have dropped to the lowest in more than three and a half years.
“Pakistan’s external account dynamics continue to deteriorate,” economist Sakib Sherani, said in a report for Alfalah Securities. “The momentum in the economy will continue to wind down till firm clarity on the political issues which could take several months.”