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The six-month Karachi Inter-bank Offered Rate (KIBOR), an equilibrium interest rate for a given tenor at which banks want to lend money to other banks, hit a 13-year high on Tuesday, revealed State Bank of Pakistan (SBP) data, signaling at the kind of prevalent inflationary expectations in the country.

KIBOR offers for nine-month and one-year tenors stood at 14.28%.

The development is a far cry from KIBOR on April 6 – a day before the SBP announced raising the key interest rate by 250 basis points – when the six-month offer stood at 12.64%, and nine-month at 12.93%.

“The 6-month KIBOR is at a 13-year high of 14.1% today, the highest level since 19-February-2009 (14.18%)," said Arif Habib Limited (AHL) in a note, adding that this is an increase of 641 basis points since June 30, and 264 basis points since December 31, 2021.

"KIBOR's movement follows that of the T-Bill auctions the SBP held a few days ago," Fahd Ali Sheikh, an investment banker, told Business Recorder. "The rate is conveying market's inflationary expectations, and the subsequent expectation that the SBP could potentially increase its policy rate in the next MPC meeting."

Returns on short-term government papers increased by up to 70 basis points in the auction held last week. Cut-off yield for the government's Market Treasury Bills (MTBs) has been on the rise for the last one month. In the previous auction held on April 7, the rate for the T-bills had risen by 60-80 bps.

Experts predict hike in inflation as Pakistan agrees to roll back fuel subsidy

Sheikh's remarks come as Islamabad prepares to roll back fuel subsidies, offered to the public by the previous government led by Pakistan Tehreek-e-Insaf (PTI), that would see prices of petroleum products go substantially higher. This, in turn, will increase inflationary pressure, but is set to sit well with the International Monetary Fund (IMF) that has just recently begun talks with Pakistan over its stalled Extended Fund Facility (EFF).

With programme revival a key priority for Finance Minister Miftah Ismail, it is only a matter of time before subsidy-reversal happens. The IMF programme is seen as crucial for Pakistan's economy that has seen its foreign exchange reserves reach a critical level of under $11 billion.

Govt seeks increase in size, duration of IMF programme

Samiullah Tariq, Head of Research at Pak Kuwait Investment Company, said the KIBOR-hike comes amid expectations of rising inflationary pressures after the price-impact is passed onto the consumers.

“However, the rise in cost of borrowing would pave way for demand moderation, which is essential to curb inflation,” he told Business Recorder.

Tahir Abbas, Head of Research at AHL, said the expected rollback of fuel subsidy would push inflation to around 15%. Inflation in March stood at 12.7%.

"The KIBOR hike comes with a view on forward inflationary outlook,” he said, adding that a slowdown in overall economic activity is expected. “The markets are likely to react negatively, but the impact remains to be seen,” he said.

The KSE-100 Index retreated 0.55% on Tuesday.

Abbas added that another policy rate hike is likely in the upcoming announcement that – according to the latest schedule released by the SBP – is due to take place on May 23.

Another analyst said the government's increased borrowing needs are likely to maintain pressure on KIBOR in the near term.

MPC schedule

Bilal Memon

Bilal Memon is the Head of Digital Content at Business Recorder. His Twitter handle is @bilalahmadmemon


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samir sardana Apr 27, 2022 10:46pm
12 months USD-PKR forwards are Rs 17 - which is 9.5% of IBR.If KIBOR is 15% - borrowing costs from Banks will be around 19% & non-bank sources,will be 24% Imports on Usance LCs - 6 months,rolled over once ,even with a Confirmation from a US/EU Bank, with a full hedge,& with Current USD - 6 months LIBOR (of 160 BPs) on the Usance LC & a spread of even 100 BPs = Loaded cost of 12-13%, ,excluding Usance LC charges. That is a party for importers - who are willing to import, on payment of import duty - who will save 6 - 12 % on loaded landed cost of imports. If a person (A) has 20 crore PKR in a bank FDR,& is liened for a LC limit - at approx. Nil Cost.He can then be a import hub for a 3rd party - to import anything.Say Party X wants Gold from UAE.So X pays 10% margin to A, gets LC opened by A to supplier in UAE - Gold lands in 2 hours, & then X pays A the balance 90% + Notional Charges +a Service Fee. A has cash for the LC tenor at US LIBOR - to invest or rotate.dindooohindoo
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