Pakistan’s central bank has raised lending rates by 300 basis points to 20 per cent, the highest of any country in Asia, as it struggles to contain rising prices and a deepening financial crisis.
The announcement on Thursday came after the rupee fell more than 6 per cent against the US dollar. Foreign exchange traders had earlier sold off Pakistan’s currency in response to a delayed IMF loan.
The interest rate rise is one of several measures Pakistan hopes will free up a stalled tranche of about $1bn held back by the IMF under its $6.5bn financing agreement with the country, which ends in June this year.
Pakistan’s central bank said “anchoring inflation expectations is critical and warrants a strong policy response”.
On Wednesday, the Pakistan Bureau of Statistics reported that inflation climbed to 31.5 per cent in February, up from 27.6 per cent a month earlier.
The country has been hit hard by rising food and fuel prices and catastrophic floods last year, a crisis compounded by political tensions that have weakened the government of Prime Minister Shehbaz Sharif. His opponents say he has resisted making tough unpopular reforms for fear of losing support ahead of parliamentary elections due to be held by October.
In recent weeks, the government has introduced austerity measures and raised a VAT-style sales tax. But critics say it has stopped short of raising the taxes of the politically influential elite such as landowners, industrialists and businessmen.
Pakistan’s failure to secure IMF funding has caused the government’s foreign exchange reserves to sink to the equivalent of less than the cost of a month’s imports.
Meanwhile, businesses complain of long delays in making payments for imports, often because of unofficial restrictions by the central bank. Companies such as automotive manufacturers have been forced to scale down production due to delays in imports of spare parts. Elsewhere, foreign airlines have faced delays in repatriating funds abroad.
The rating agency Moody’s this week cut Pakistan’s sovereign credit rating by two notches to “Caa3”, saying the country’s “increasingly fragile liquidity and external position” had significantly raised the risk of default.
Moody’s warned that “weak government and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing”.
“Pakistan’s economy is heading towards a very dangerous future. Our already sluggish growth will fall further. The new interest rate will make it impossible for many businesses to afford borrowings and still make money,” said Ihtisham ul Haque, a commentator on the Pakistan economy. “The situation has become very grim.”
IMF managing director Kristalina Georgieva recently told German broadcaster Deutsche Welle that the multilateral lender was trying to help Pakistan avoid “a dangerous place where its debt needs to be restructured”.
She denied Islamabad’s criticism that such measures would hurt the poor, arguing that rich Pakistanis benefited from government largesse. “It should be the poor to benefit from [subsidies],” she said. “We want the poor people of Pakistan to be protected.”