Pakistan Unexpectedly Raises Rate Citing Loose Fiscal Policy

(Bloomberg) -- Pakistan’s central bank unexpectedly raised its key rate, citing fiscal deficit concerns at a time the nation is looking for external aid to avoid a balance-of-payment crisis.

The target policy rate was raised for the fifth straight meeting to 10.25 percent from 10 percent, State Bank of Pakistan Governor Tariq Bajwa said at a briefing in Islamabad Thursday. While five of the 30 economists surveyed by Bloomberg predicted a hike, none of them saw a 25 basis-point increase. While four saw a half-point increase and one a 100 basis points hike, others expected no change.

Key Insights

• The State Bank raised rates by a cumulative 425 basis points last year, making it one of the most aggressive central banks in Asia
• The hike comes despite inflation slowing to 6.2 percent in December, below the central bank’s annual target of 6.5 percent to 7.5 percent
• The South Asian nation is tapping friendly nations to bridge a financing gap of more than $12 billion. It secured $6 billion from the United Arab Emirates and Saudi Arabia, while China is expected to follow suit. It is also negotiating a loan agreement with the International Monetary Fund
• The aid will help Pakistan avert a balance-of-payment crisis with imports triple the size of exports amid dwindling foreign exchange reserves

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• Governor Bajwa expressed concerns about budget gap, saying “fiscal deficit is yet to show signs of consolidation despite reduction in spending”
• “Even as stabilization measures gradually work through the economy, underlying inflationary pressures persist,” he said
• Real gross domestic product growth in financial year 2019 to be around 4 percent, Bajwa said Thursday, while the government target is 6.2 percent
• “As part of a stabilization program, both monetary and fiscal policies would need to be tighter,” Bilal Khan, a senior economist at Standard Chartered Plc in Dubai, said before the decision. He predicted a hike by the State Bank

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