Business Recorder
EDITORIAL: The Monetary Policy Committee (MPC), as widely anticipated, raised the policy rate by 100 basis points to 11.5 percent though market projections had varied from 50 basis points to 200 basis points. The reason for the divergence in market perceptions is two-fold. First, traditionally the MPC has been extremely sensitive to International Monetary Fund (IMF) dictates, especially under an ongoing programme, and therefore domestic analysts are easily stumped in their projections as the Fund adheres to basic economic theory that inflation can be controlled by adjusting the discount rate while domestic economists emphasize the fact that the policy rate impacts on the Pakistani economy through the budgeted mark-up as a consequence of massive annual government borrowing – mark-up, which is by far the single largest component of the budget’s current expenditure. In the ongoing fiscal year 8 trillion rupees has been earmarked for mark-up against 2.5 trillion rupees for defence and nearly 2 trillion rupees for grants and transfers, including the Benazir Income Support Programme. In contrast, private sector borrowing is a very small portion of total bank lending (reflected by the fact that 1.25 trillion rupees was borrowed by the power sector alone in the current year under the aegis of the administration to retire the circular debt) while July-March 2026 total credit to the private sector was 887.5 billion rupees as per the Finance Division with major sectors including textiles and cement lamenting high input costs and tight monetary and fiscal policies as reasons behind more than 150 unit closures. The Fund on 27 March announced that the staff level agreement was reached on the third review of the ongoing programme followed by the declaration that “inflation and the current account balance remained contained, and external buffers continued to strengthen;” but appropriately added that “the conflict in the Middle East, however, casts a cloud over the outlook as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weigh on growth and the current account.” Thus, between the authorities arguing for a lower rate rise as it impacts on growth and the Fund no doubt arguing for a higher rate an agreement was no doubt reached to raise it by 100 basis points with the proviso that if the conflict continues adjustments would be further made in the next scheduled MPC meeting on 15 June. Secondly, it is relevant to note that during the tenure of Dr Reza Baqir as Governor SBP the MPC adhered to Consumer Price Index (CPI) as the yardstick for determining the policy rate while previously core (non-food and non-energy) inflation was used as the determining factor. Data suggests that core inflation is again the determinant of the policy rate – an observation substantiated by the fact that in March 2026 CPI rose to 7.3 percent against 7 percent in February; however, a similar rise of 0.3 percent – from 6.9 percent in September 2024 to 7.2 percent in October led to a 250 basis point reduction in the policy rate — from 17.5 percent on 12 September 2024 to 15 percent on 4 November 2024. Core inflation on the other hand was 7.4 percent in March 2026, with the same rate in April 2025 when the MPC had decided to cut the rate by 100 basis points to 11 percent as it did on Monday this week. Significantly, the Monetary Policy Statement noted that “to achieve the targeted full-year primary surplus, a larger cut in expenditures may be required. In this regard, the MPC emphasized the need for sustained fiscal reforms, including broadening the tax base and curtailing SOE losses, to strengthen fiscal sustainability and resilience.” Previous MPS had desisted from mentioning a cut in expenditures with ostensibly the overarching objective not to antagonize powerful stakeholders though, if asked, the finger may be pointed to slashing the development programme further, already massively slashed with negative implications on growth rather than on curtailing current expenditure. This bold observation was followed by the usual exhortation to implement sustained fiscal reforms. The MPS further noted that “the government has proactively raised external financing via enhanced bilateral arrangements and issuance of Eurobonds, which cushioned the impact of the recent debt and liability repayments on SBP’s FX reserves. In this regard, SBP’s FX reserves are now assessed to reach above $18 billion by June 2026. Going forward, the Committee emphasized the need for further strengthening in FX buffers amidst the uncertain global economic conditions.” However, what may become a sore point between the Fund staff and the SBP is touched upon, yet again, in the staff level agreement reached on the third review: “exchange rate flexibility should continue to serve as the primary shock absorber, including against spillovers from the conflict in the Middle East, while the SBP should ensure that the banking system remains able to accommodate import financing and other external payments amid potentially elevated balance of payments pressures.” The exchange rate has been fluctuating within a narrow band — between 278 and 280 rupees to the dollar — with market players, domestic and international, expressing concern at the rupee’s sustained strength. Copyright Business Recorder, 2026
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