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ISLAMABAD: The decision to raise the discount rate by 25 basis points may have been taken to appease the International Monetary Fund (IMF) ahead of the forthcoming sixth review meeting that the authorities are taking mitigating action to suppress excess demand.

This was the consensus of economists while speaking to Business Recorder by telephone after the SBP announced the rate increase from 7 to 7.25 percent.

Additionally, the decision to raise the rate was targeted to lower the rising pressure on the current account deficit though it will add to debt, increase debt servicing and dampen economic activity.

First hike in over 2 years: SBP raises key interest rate by 25 basis points

Former Finance Minister Dr Hafeez Pasha said that the increase in policy rate simply indicates increasing pressure on balance of payment as exports are at present one-third of total imports.

He further added that current account deficit for the first two months of the current fiscal year (July, August) rose by about $2.5 billion each month and if this trend continues in the remaining months of the year it would close at $15 billion. Additionally, he said that the country would also be required to make debt repayment of $11 to $12 billion.

Former Adviser Finance Ministry Dr Ashfaque Hassan stated that the increase in policy rate would have negative impact on the economy and investment.

He labelled the rise as the second phase that would damage the economy pointing out that in the first phase interest rate was increased from 6 percent to 13.25 percent - a policy decision whose repercussions are still visible on the economy. This coupled with massive depreciation of the rupee against dollar - from 126 to 167 rupees has fuelled inflation in the country and propelled a considerable number of people below the poverty line.

Upcoming MPC: Majority expect status quo but a greater divide is now visible

When asked if the increase in policy rate would have any impact on growth, he responded ‘forget about growth. This decision will destroy the economy”.

However, an official on condition of anonymity said that increase in policy rate was necessary to offset increasing pressure on exchange rate which was fuelling inflation as the country was heavily reliant on imports of essential commodities. A need was felt to strike a balance between exchange rate and policy rate to suppress excess demand, he added.

Copyright Business Recorder, 2021

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