Pakistan’s CB cuts key interest rate by 100bps to 19.5 per cent

Pakistan’s central bank cut the key interest rate by 100 basis points to 19.5 per cent, its governor said on Monday, a decision in line with expectations of investors and analysts.

The widely forecast move followed the bank’s decision to cut rates - from a record high of 22 per cent - for the first time in nearly four years at its last meeting in June, as it signalled that soaring inflation was tempering.

Monday’s monetary policy meeting was the first since Pakistan’s government passed its budget and reached an agreement with the International Monetary Fund (IMF) for a $7 billion, 37-month loan programme.

The programme includes tough measures such as increased tax on farm income and raising electricity prices, prompting concern among poor and middle class Pakistanis grappling with the risk of further inflation and the prospect of higher taxes.

However, inflation has slowed in recent months. Pakistan’s consumer price index (CPI) rose 12.6 per cent in June from a year earlier, giving the central bank room to cut rates, analysts said.

Meanwhile the Asian Development Bank (ADB) approved a $400 million concessional loan to support the reconstruction of houses and community infrastructure in Pakistan’s Sindh province damaged by the devastating floods in 2022. The Sindh Emergency Housing Reconstruction Project will rehabilitate flood-damaged houses and community infrastructure and support livelihood recovery, with a focus on strengthening communities’ resilience against climate change-induced natural hazards.

This project is a key part of ADB’s multifaceted response to Pakistan’s flood crisis and forms part of the bank’s commitment to provide $1.5 billion in total assistance from 2023 to 2025 to accelerate the country’s flood recovery.

“This project will help rebuild homes and communities, and restore livelihood and basic services in Sindh, the province most affected by the devastating 2022 floods,” said ADB Director General for Central and West Asia Yevgeniy Zhukov. “It is part of ADB’s extensive support to help Pakistan recover from the disaster which affected 33 million people and damaged houses and infrastructure across the nation.”

Sindh province sustained about 83 per cent of the total housing damage inflicted by the 2022 floods, with around 2.1 million houses either fully destroyed or damaged. Two years on, many victims still reside in inadequate, temporary shelters lacking essential services such as water, sanitation, and electricity.

The project will support conditional cash grants for the reconstruction of 250,000 houses.

Meanwhile Pakistan has initiated talks on reprofiling its power sector debt to China, alongside talks on structural reforms suggested by the International Monetary Fund, Pakistan’s finance minister told a press conference on Sunday.

He said that Pakistan will address the reprofiling of Chinese credit to the power sector on a project-by-project basis and that Islamabad is looking to appoint a local advisor in China for the purpose.

The finance minister stressed that it is reprofiling and not restructuring of debt because there is no question of cutting the amount it owes. Reprofiling is generally understood to involve an agreed lengthening of the time needed to repay.

The countries, which share a border, have been longtime allies, and rollovers or disbursements on loans from China have helped Pakistan meet its external financing needs in the past.

Pakistan is in talks with Saudi Arabia, the United Arab Emirates, and China in order to meet gross financing needs under the IMF programme for which Islamabad needs a board level approval. The IMF this month agreed on a $7 billion bailout for the heavily indebted South Asian economy, while raising concerns over high rates of power theft and distribution losses that result in debt accumulating across the production chain.

Separately, the Asian Development Bank (ADB) approved a $400 million concessional loan to support the reconstruction of houses and community infrastructure in Pakistan’s Sindh province damaged by the devastating floods in 2022.

The Sindh Emergency Housing Reconstruction Project will rehabilitate flood-damaged houses and community infrastructure and support livelihood recovery, with a focus on strengthening communities’ resilience against climate change-induced natural hazards.

This project is a key part of ADB’s multifaceted response to Pakistan’s flood crisis and forms part of the bank’s commitment to provide $1.5 billion in total assistance from 2023 to 2025 to accelerate the country’s flood recovery.

“This project will help rebuild homes and communities, and restore livelihood and basic services in Sindh, the province most affected by the devastating 2022 floods,” said ADB Director General for Central and West Asia Yevgeniy Zhukov. “It is part of ADB’s extensive support to help Pakistan recover from the disaster which affected 33 million people and damaged houses and infrastructure across the nation.”