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Economy

Pakistan hikes interest rates to 5-year high after IMF deal

Inflation-fighting move takes borrowing rate to more than 12%

Shopping for groceries at a store in Peshawar. Pakistan's rupee has become Asia's weakest currency in recent months.   © Reuters

ISLAMABAD -- Pakistan's central bank on Monday raised its key interest rate by 150 basis points to 12.25%, the highest level in five years, as it moves to contain inflation.

Analysts said the interest rate hike also was meant to support the Pakistan rupee, which has become Asia's weakest currency in recent months. The rupee has depreciated by over 5.9% against the dollar since March, and more than 33% since late 2017.

"The central bank is seeking to deal with inflation," said Abid Sulehri, a member of an independent government council advising on the economy. "Additionally, they must also be looking at the need to encourage savings in Pakistan."

Sakib Sherani, a former adviser to the finance ministry, told Nikkei the central bank's action represented one element of a policy mix.

"Pakistan is on a classic stabilization path, with the policy mix reflecting tight fiscal and monetary policies amid currency adjustment," he said.

The interest rate increase comes after Prime Minister Imran Khan's government and the International Monetary Fund announced a technical agreement May 13 for a three-year loan of $6 billion to the South Asian country. Inflation stood at around 9% in March.

The agreement still needs approval from the IMF's senior management and its executive board in Washington. But Pakistani officials have told Nikkei that approval is set to follow if the country carries out actions previously agreed upon with the fund's staff.

"The latest interest rate increase is one such action for which there is an understanding with the IMF," a senior government official told Nikkei on Monday.

The central bank might raise the interest rate further in the coming months, the president of a private Pakistani bank told Nikkei on condition of anonymity.

"If our economy begins to move, the rupee gets stable, inflation is tackled and our government can reduce its fiscal deficit, maybe the pressure to increase [interest rates] will subside," the president said. "Otherwise, more corrective action will have to be taken."

Khan's administration is expected to withdraw many tax concessions and subsidies when Pakistan's annual budget is announced, likely in the second week of June, government officials have told Nikkei recently. Such measures likely will be unpopular with the public.

But Western economists said that Khan faces a difficult reform agenda -- notably, fixing Pakistan's chronically dysfunctional tax collection system.

Fewer than 1% of the over 200 million people in Pakistan pay income tax. The country's tax-to-GDP ratio has hovered around 11% of gross domestic product for years, below the level of at least 15% recommended by independent experts.

After the central bank's announcement Monday, a senior government economist who requested anonymity told Nikkei that "managing Pakistan's economy is going to get tougher under an IMF program in the future."

"Going forward, the government's own hands will get tied, as it will also have to deal with higher cost for debt servicing," the economist said.

Leaders of Pakistan's main opposition parties -- the Pakistan Muslim League, loyal to former Prime Minister Nawaz Sharif, and the Pakistan People's Party, led by former President Asif Ali Zardari -- agreed on Sunday to intensify protests against the government.

During a meeting over dinner in Islamabad, opposition leaders cited Pakistan's "worsening economic trends" and "increasing economic difficulties" as driving their campaign.

In recent weeks, Pakistan's opposition parties have increasingly targeted Khan for seeking an IMF loan. The prime minister had promised before his election in 2018 never to seek out the Washington-based lender.

Senior opposition politicians said they have decided to prepare for protests as daily life grows increasingly harsh for ordinary Pakistanis due to Khan's economic policies under the IMF program.

Khan has reached out to friendly countries -- such as Saudi Arabia, the United Arab Emirates and China -- over the past year for more than $9 billion in loans to boost Pakistan's sagging liquid foreign currency reserves.

But Pakistan's economic outlook remains weak, and analysts warn that the country cannot regain stability without the IMF's stamp of approval for its economic policies.

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