Following a significant devaluation in the currency and as the government proposed an increase in energy prices and taxes to comply with the International Monetary Fund's loan requirements, Pakistan's consumer price inflation spiked to 31.5% in February 2023, the highest rate since June 1974. At the same time, economic problems have grown as a result of last year's terrible storms. Cost increased further in all components: transport (50.5% vs 39.1% in January), housing & utilities (13.4% vs 7.8%), food & non-alcoholic beverages (45.1% vs 42.9%), alcoholic beverages & tobacco (49.2% vs 36.3%), furnishing & household equipment maintenance (34% vs 30%), recreation & culture (48.1 percent vs 44.1 percent), restaurants & hotels (34.5 percent vs 30.1 percent) and clothing and footwear (17% vs 16.8%).
In order to combat the country's skyrocketing inflation, which it anticipates will accelerate further as it seeks to renew a $6.5 billion bailout from the International Monetary Fund, Pakistan's central bank increased its benchmark interest rate to 20%.
The target rate was raised by 300 basis points from 17% by the monetary policy committee of the State Bank of Pakistan, according to a statement posted on its website on Thursday. 6 out of 38 economists who saw the move anticipated an increase of 200 basis points. According to statistics gathered by Bloomberg, the current 20% is the highest since June 1997 when the central bank used a different benchmark.
The latest budget adjustments and currency rate depreciation, according to the central bank statement, have significantly worsened the near-term inflation picture and further pushed inflation expectations upward. "The immediate costs of reducing inflation are less than the enduring costs of permitting it to persist."
The average inflation rate for the fiscal year that ends in June is now anticipated to be between 27% and 29%, up from the November prediction of 21% to 23%, the report stated. According to figures from the central bank, price increases accelerated for a third month in February, reaching 31.55%, the highest level since the 1960s.
The central bank stated, "The Committee anticipates inflation to increase further in the following several months as the impact of these measures unfolds before it begins to decrease, albeit at a sluggish rate. The SBP's next monetary policy review will take place on April 4.
The new tightening occurs as the country works to get the IMF bailout in order to avoid a default on its debts, access further cash, and prevent serious supply shortages. According to Fitch Ratings, there will be $7 billion in repayments in the upcoming months, including a $2 billion Chinese loan that is due in March.
Governor Jameel Ahmad stated in an analyst briefing that Pakistan is still "determined to meet all debt payments" and that the country has roughly $3 billion in debt that has to be repaid while another $4 billion is anticipated to be rolled over till June.
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