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SBP gears up to ‘revise’ interest rates in off-cycle review on March 2

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  • No MPC meeting held to date since last month, says SBP.
  • Market expects SBP to raise benchmark interest rates.
  • Government agreed to hike interest rate from 17% to 19%.

The State Bank of Pakistan (SBP) on Tuesday “preponed” its Monetary Policy Committee (MPC) meeting on March 2 — which was initially scheduled to meet for March 16 — in another attempt to increase the pace of efforts to secure the much-awaited International Monetary Fund’s (IMF) tranche. 

The SBP announced on its official Twitter handle that “the forthcoming meeting of the Monetary Policy Committee has been preponed and now it will be held on Thursday, March 02, 2023,” the central bank announced on its Twitter handle.

The SBP’s chief spokesperson Abid Qamar had said earlier that, following the meeting last month, no MPC meeting had been held to date.

The MPC was established under the SBP’s Amendment Act, which is empowered to take a decision keeping in view the macroeconomic fundamentals.

The market expects the SBP to raise benchmark interest rates as the rise in treasury yields in the last auction hinted towards market weighing-in concerns on the economic front with the investors continuing to take note of rising inflation around the world as well as in Pakistan, Arif Habib Limited stated in a commentary released earlier.

Moreover, sources had told Geo News last week thatthe coalition government had agreed to hike the interest rate from the existing level of 17% to 19% under one of the major conditions put forth by the Fund to revive the loan programme.

However, analysts believed that the SBP needed to bring forward the MPC meeting date as the ministry of finance cannot afford failure in the next T-bill auction.

It is to be highlighted that the Fund and the central bank had held a round of discussions about the possibility of further tightening of monetary policy and building up foreign exchange reserves by the end of June 2023.

The IMF had also asked the SBP for hiking the policy rate by 300 to 400 basis points in order to move towards the interest rate from a negative to a positive trajectory.

The cash-strapped country is undertaking key measures to secure IMF funding, including raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. While the government expects a deal with IMF soon, media reports say that the agency expects the policy rate to be increased.

Off-cycle rate reviews are not uncommon in Pakistan, though.

Adnan Sheikh, Assistant Vice President of Research at Pak Kuwait Investment Company, said that a rate hike is imminent.

Fahad Rauf, Head of Research at Ismail Iqbal Securities, said that the IMF has given a target to at least keep rates higher than core inflation.

“Pakistan has two core inflation readings i.e., urban (15.4% for Jan-23) and rural (19.4%) and no national core number is released. If the SBP tries to bring rates above rural core inflation, it requires a rate hike of 200-300 bps,” he said.

Mohammad Ayub Khuhro, a fund manager at a local fund, said that recent economic data on government finances suggest that it was running low on its cash balances held with the central bank.

“This is why the government went ahead with picking up their desired targets despite a signalling effect it would send to the markets,” Khuhro said.

“The government has effectively bypassed the central bank in order to fulfil IMF conditions by accepting a higher cut-off,” he added.

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Over 600 points are added by PSX in intraday trading.

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Tuesday’s lunchtime trading on the Pakistan Stock Exchange saw favorable activity.

During intraday trading, the benchmark KSE-100 Index increased by 672.08 points, or 1.11%, and was trading at 61131.82 levels.

The KSE-30 Index was trading at 20,558.31 after adding 211.46 points, or 1.04%.

The Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples’ Party (PPP) had another round of discussions for the establishment of a central government the day before the rally in the local stock exchange.

In the meanwhile, Fitch Ratings has issued a warning, stating that the likelihood of default would rise in the event of a drawn-out discussion or the inability to reach an agreement with the International Monetary Fund (IMF).

According to the State Bank of Pakistan, which reported net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion on February 3, 2023, Pakistan’s external situation has improved recently.

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The smartphone app “Tajir Dost” to tax Pakistani businesses is anticipated to launch on February 22.

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The sources stated that the caretaker administration aims to include 3.5 million shops in the tax net by use of the “Tajir Dost” app.

They said that Anwaar-ul-Haq Kakar, the acting prime minister, has instructed the relevant authorities to conclude their engagement with the retailing bodies within a few days.

The introduction of the “Tajir Dost” smartphone app to impose taxes on several merchants was authorized earlier this month by the acting federal administration.

The smartphone application, created by Pakistan Revenue Authority Limited (PRAL), a division of the Federal Board of Revenue (FBR), is intended to serve as a registration tool for shops and dealers throughout the nation.

The app’s database will be updated with the traders’ information who have already registered with the FBR.

Previously, in December 2023, the Federal Board of Revenue (FBR) made history by collecting Rs1.021 trillion. After deducting refunds of Rs 38 billion that were given out that month, the FBR’s net collection increased to Rs 984 billion.

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SBP confirms the choice to use new currency notes was not influenced by the IMF.

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In response to recent rumours, Saleem Ullah, the deputy governor of the State Bank of Pakistan (SBP), said on Thursday that the International Monetary Fund (IMF) had no influence over the decision to release new currency notes.

Saleem Ullah underlined in an interview that printing new notes is a regular procedure carried out every 15 to 20 years to maintain the currency’s integrity.

He stressed that, in contrast to rumours, the deficit is expected to decline in the next fiscal year, in line with the goals of the new monetary policy.

“Every 15 to 20 years, new notes are printed,” he clarified. The new currency’s goal is to keep the note’s integrity intact.”

The SBP assured the public earlier this week that the current banknote series will continue to be in circulation despite the introduction of new currency notes, which it intended to implement over the course of the next two years.

Regarding the latest series of currency notes, the deputy governor clarified that they were launched in 2005 and were in circulation for three years.

He admitted that the procedure was time-consuming and estimated that because of the careful preparation required, it would take around two years to issue the first note.

In addition, he guaranteed that the new banknotes will have improved security measures because they would be made using contemporary technology. He gave information regarding the SBP’s effort to get public feedback on the new currency notes’ design, highlighting the fact that recommendations were being actively sought from the populace.

“There are three prizes for each denomination, and there are a total of seven denominations, hence 21 prizes,” he disclosed, highlighting the process’ openness. First place is worth Rs 1 million, second place is worth Rs 500,000, and third place is worth Rs 300,000.

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