Islamabad: Pakistan has assured the International Monetary Fund (IMF) that it will keep increasing the interest rate and purchase dollars from the open market to buffer reserves.
The development comes after the IMF blamed the State Bank of Pakistan for its failure to prioritise the most pressing challenge of building reserves.
“The SBP indicated that the policy interest rate would be further adjusted to ensure a positive real interest rate and an attractive interest differential to encourage capital inflows, help prevent foreign exchange outflows and contain inflationary pressure,” according to the latest IMF report.
In November, the SBP had increased its key discount rate by 0.5% to 10%.
The policy of increasing interest rates to control inflation is criticized, as the single largest borrower, the federal government, would borrow at any cost. The policy of purchasing dollars is also questioned from the open market to build reserves as such steps cause rupee devaluation, which, in return, further increases inflation.
In September last year, Pakistan had entered into a tough agreement for a $6.7-billion loan aimed at avoiding a looming default on international payments. However, despite that, the country’s foreign currency reserves stand at a critically low level.
“SBP policies have thus far failed to give a sufficient priority to the crucial challenge of rebuilding reserves,” said the IMF in its report, highlighting the central bank management’s failure that is unable to perform one of its core functions.
The last IMF report had also criticised the SBP for using $3.5 billion to defend the rupee during an election year. However, during a cabinet meeting held last Wednesday, Finance Minister Ishaq Dar instead accused his predecessor Saleem Mandviwalla for an irrational use of reserves and saved Governor SBP Yaseen Anwar’s skin in front of Prime Minister Nawaz Sharif.
In its fresh report, the IMF said that the SBP must, unhesitatingly, use every policy tool at its disposal to boost reserves, including adjusting the policy rate, intervening to purchase reserves on the spot market and allowing greater flexibility of the exchange rate. It said the net $200 million purchase that the SBP has made since November constituted merely an initial step in the direction.
The IMF admitted that these steps may “temporarily increase inflation” but termed them necessary to build reserves.
The IMF also noted that capital inflows remained slower despite the programme. A few disbursements from development partners are now delayed, leaving a particularly tight balance of payments situation between now and March 2014, it added.
The IMF hoped that these disbursements may materialise either in the last quarter of the fiscal year or even go on to the next financial year.