In order to lower inflation, the International Monetary Fund (IMF) wants Pakistan to raise interest rates even more.
The lender presented a gloomy image for the Middle East and Central Asia economies’ near-term future in its regional economic assessment for the area. According to the report, “the MENA economies and Pakistan are expected to experience a soft patch this year due to tight policies being implemented in many countries to restore macroeconomic stability.”
The lender stated that “a tighter monetary policy should be considered (Egypt, Pakistan, Tunisia) in countries where inflationary pressures continue and the stance is loose.”
In the report, the lender went into great detail to explain that headline inflation continued to trend upward in the majority of EM&MIs, including Egypt, Morocco, Pakistan, and Tunisia. This was partly due to the effects of previous exchange rate depreciations and persistently high food prices, but it was also due to broader price pressures, as evidenced by the rise in core inflation amid loose monetary policy (Egypt, Pakistan, Tunisia).
According to the lender, Pakistan’s policy interest rates were below model-based predictions of natural rates towards the end of 2022, indicating that more increases were required to achieve stability. Relevantly, in order to control inflation, which climbed to 36.4 percent in April, the State Bank of Pakistan already increased interest rates to 21 percent.
In 2022, Pakistan undertook a significant budgetary growth. The research observed that because of rising commodity prices, most low-income nations’ primary budgetary circumstances deteriorated.
Low-Income Economies Like Pakistan Continue to Have Vulnerabilities
The lender notes that in 2022, increased inflation played a major role in keeping public debt under control in Pakistan and the majority of MENA EM&MIs. In Jordan and Egypt, debt ratios modestly decreased as greater nominal GDP growth outweighed increased interest expenses. Public debt-to-GDP ratios, on the other hand, have been steadily increasing in Pakistan and Tunisia, which is due to a combination of persistently high overall budget deficits and the impact of exchange rate depreciations, which counterbalance the damaging effects of high inflation.
“External vulnerabilities continue to be significant, particularly in EM&MIs. In 2022, the average current account deficit for MENA EM&MIs increased from 4.7 percent of GDP to around 5 percent of GDP. As a result of higher commodity prices, the widening in Pakistan was more pronounced (growing from 0.8 percent of GDP to 4.6 percent of GDP), the report noted.
Generally speaking, the minor easing of financial constraints in Pakistan and the MENA area from October 2022 was reversed by the tightening of global financial conditions in March amid the crisis in the world’s banks. In the meantime, sovereign bond spreads have widened and average borrowing costs in various EM&MIs (Lebanon, Pakistan, Tunisia) have risen significantly since October 2022.
“Pressures on exchange rates and international reserves remain significant, with sharp depreciations in some EM&MIs (Egypt, Pakistan) since October 2022,” the report stated.
According to the report, Pakistan’s growth rate is forecast to significantly slow from 6.0 percent in 2022 to 0.5 percent this year due to difficult macroeconomic conditions, such as damage from widespread flooding, pressures from widespread inflation, and tighter monetary and financial conditions.
According to the lender, Pakistan’s inflation is expected to more than double this year to above 27%, reflecting broader pricing pressures.
According to the IMF assessment, the region’s EM&MIs still have high levels of external vulnerabilities, which are highlighted by huge current account deficits and declining foreign currency reserves in several nations in 2022. Pakistan and MENA EM&MIs are expected to continue to have significant demands for external financing.
The lender stated in a separate statement that regional financial markets have followed global trends, with nations with heavy debt loads feeling the effects more keenly. The majority of the region’s equity markets have fallen, with the biggest drops occurring in Egypt, Jordan, Oman, Pakistan, and Qatar.