Pakistan central bank keeps key rate unchanged at 22 per cent

Pakistan’s central bank kept its key interest rate unchanged at 22 per cent, in line with market expectations, after its policy review on Monday. The decision comes ahead of a visit by a delegation of the International Monetary Fund on Thursday that will review progress on targets set in a $3 billion programme approved in July to bail out the struggling economy.

“The MPC (monetary policy committee) emphasised on continuing with the tight monetary policy stance,” the State Bank of Pakistan said in a statement, adding that although headline inflation had risen in September, the bank expected it to decline in October and keep falling in coming months.

The central bank had previously said it expected inflation to ease this financial year - which began on July 1 - to average around 20 per cent to 22 per cent, down from 29.2 per cent in financial year 2022-23.

Inflation rose sharply to 31.4 per cent in September on the back of a record fuel price hike, but the government has since slashed prices at the pump.

Inflation figures for October are due later this week.

The IMF forecasts inflation at 25.9 per cent this year, and has advocated mildly positive rates, but the central bank chief has said previously that the global lender had not stated that it expects rate hikes, only for the policy stance to remain aggressive.

He had also said that the bank had met key targets set by the IMF ahead of the visit.

It kept the key interest rate unchanged in its previous two meetings in July and September, having earlier raised it by 12.25 percentage points to 22 per cent in a series of hikes since April 2022.

Pakistan’s currency, which saw a sharp decline in August, has also recovered significantly against the dollar following a crackdown on black market trading, which has helped tame inflation.

A quick and successful IMF review remains critical for cash-strapped Pakistan, which narrowly avoided a default on debt obligations earlier this year thanks to a last-gasp new deal that replaced an incomplete and stalled programme.

Continued external funding is needed to finance a large number of payments due this financial year. Islamabad is counting on investments from Middle Eastern allies such as Saudi Arabia and the United Arab Emirates. In addition to the investments, Pakistan is also relying on the materialisation of funds pledged by bilateral and multilateral donors for reconstruction efforts following devastating floods in 2022.

Pakistan’s caretaker Prime Minister Anwar ul Haq Kakar said earlier that his country has completed more than 50 projects worth $25 billion under the China-Pakistan Economic Corridor (CPEC).

Kakar was speaking at the Belt and Road Forum in Beijing. The CPEC is a flagship project under China’s Belt and Road Initiative, with more than $65 billion pledged for road, rail and other infrastructure developments in the South Asian nation of 241 million people.

“We have completed over 50 projects worth $25 billion under the CPEC,” Kakar said, adding that a very significant airport at the southwestern Gwadar port, which is being built with Chinese money as part of the CPEC, will soon be inaugurated.

Gwadar is located near the Strait of Hormuz, a crucial oil shipping route in the Arabian Sea. Beijing has invested heavily in the southwestern mineral-rich province of Balochistan, including developing the deepwater port, despite a decades-long separatist insurgency in the area. The security of the Chinese nationals and their interests, which are often attacked by the insurgents, remains the biggest challenge for Islamabad.

Chinese President Xi Jinping began the Belt and Road Initiative about a decade ago, aiming to build infrastructure and energy networks connecting Asia with Africa and Europe through overland and maritime routes.

Representatives of more than 130 countries, largely from the Global South, attended the forum, including several heads of state, of whom the most prominent was Xi’s “dear friend” Russian President Vladimir Putin.

Building industrial zones with Chinese and local Pakistani collaboration remains in the pipeline, together with a rail track of over 2600km costing nearly $7 billion, the biggest single project under the CPEC.

Clean energy projects were expected to be completed in the next four to five years under the CPEC, Kakar said.

Meanwhile Chinese President Xi Jinping warned against decoupling from China as he opened the Belt and Road Initiative (BRI) forum in Beijing on Wednesday, criticizing Western efforts to reduce dependence on the Chinese economy.