Economists predict further rate hikes for crisis-hit Pakistan, Sri Lanka

Monetary conditions in crisis-hit countries–Sri Lanka and Pakistan–are the toughest in decades to rein in Asia’s fastest inflation rates stoked by the debt crisis and funding woes. The countries’ decades-high borrowing costs will be in the spotlight Tuesday as elevated inflation persists and debt troubles linger.

Of 37 economists in a Bloomberg survey, 34 experts expect a hike ranging from 100-300 basis points for Pakistan, while the other three forecast a hold in the target rate as of Monday. State Bank of Pakistan is expected to announce the decision around 4 pm local time.

Hasnain Malik, a strategist at Tellimer in Dubai who expects further increases in both countries said that higher interest rates will shoulder the burden of countering inflation and establishing at least one leg of policy credibility.

“Global fuel and food prices have come down but this may not be evident yet in Pakistan and Sri Lanka,” said Hasnain who declined to provide specific estimates on the hikes, Bloomberg reported.

Crisis-hit Sri Lanka has secured a $3 billion International Monetary Fund (IMF) loan program last month, the road to turning the troubled economy around remains rocky as debt issues hang, while Pakistan is teetering on a debt default as the IMF bailout is in limbo.

While approving funding for Sri Lanka, the financial body said it wants to see headline inflation slow to the 4-6% band by early 2025 and that the central bank must be ready to adjust its policy stance as needed.

According to chief economist at Citigroup Global Markets Johanna Chua, the IMF will probably want to see a narrowing of the gap between policy and market interest rates.  Chua expects another one percent hike on Tuesday.

Sri Lanka’s three-month government bill yield hovers at about 26% against the 16.5% benchmark rate, as per Bloomberg reports.

On the other hand, Pakistan’s IMF loan program is yet to materialize months after it raised taxes and energy prices and allowed the currency to depreciate to meet the Fund’s conditions. The nation has missed multiple deadlines to resume its $6.5 billion bailout.

Shivaan Tandon of Capital Economics, which expects a 200-basis-point hike Tuesday said that policymakers will also be keen to impress the IMF, by displaying their commitment towards containing inflation, to secure much-needed funding to mitigate the risk of default and raise the dangerously low level of foreign-exchange reserves.

Pakistan’s inflation quickened by a record last month, beating the median estimate and setting the stage for another jumbo increase on Tuesday.

While foreign exchange reserves have risen to $4.24 billion after China committed $2 billion in loans but it still covers only about one month of imports. Pakistan needs to repay about $3 billion of debt by June.

The Washington-based lender has asked Pakistan to seek commitments from Saudi Arabia and the United Arab Emirates before it revives the bailout, Finance Minister Ishaq Dar told the parliament last week.

Mint.

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