IMF urges Pakistan to continue monetary tightening as inflation concerns persist

Karachi: The International Monetary Fund (IMF) on Tuesday urged Pakistan to continue its ongoing monetary tightening cycle, as stated in a staff report released on Tuesday.

This recommendation comes just a week after the IMF approved a new bailout arrangement for the country and less than two weeks ahead of Pakistan's central bank's next policy meeting.

While welcoming the recent policy rate hike, the staff report emphasized the need for the tightening cycle to persist if necessary to combat inflation and facilitate external rebalancing.

Last month, Pakistan's central bank held an emergency meeting following the country's budget revision for the fiscal year, which aligned with the IMF's demands to secure a stalled tranche from the now expired Extended Fund Facility (EFF). Instead, Pakistan was granted a $3 billion lifeline through a standby arrangement.

The State Bank of Pakistan (SBP) has raised its key policy rate by 12.25 percentage points since April 2022, primarily to address surging inflation. The upcoming monetary policy meeting is scheduled for July 31.

The staff report also emphasized the need for the forward-looking real policy rate to return to positive territory in the short term to re-anchor expectations and achieve the SBP's inflation objective over the medium term.

In the Memorandum of Economic and Financial Policies (MEFP) resulting from discussions with the IMF, Pakistan expressed its readiness to consider further action during the next monetary policy committee meeting and subsequent ones until inflation and inflation expectations show a clear downward trend. The pace of future adjustments will depend on various factors, including inflation data, exchange-rate developments, external position strength, and the fiscal-monetary policy mix.

The MEFP further stated that their aim is to ensure the real policy rate returns to positive territory on a forward-looking basis to signal their commitment to bringing inflation within the target band within FY26.

The Pakistani government has forecasted inflation to reach 21% for fiscal year 2024.