- After slew of rate hikes, inflation remains stubborn in both
- Sri Lanka creditors set to tussle, Pakistan bailout in limbo
According to Bloomberg article published on April 4, 2023, Pakistan’s and Sri Lanka’s decades-high borrowing costs will be on spotlight Tuesday as elevated inflation persists and debt troubles linger.
Monetary conditions in Pakistan and Sri Lanka are already the tightest in decades — 25 years and 21 years respectively — to rein in Asia’s fastest inflation rates stoked by debt crises and funding woes. Latest prints showing stubborn price pressures may spur more tightening.
Thirty-four of 37 economists in a Bloomberg survey expect a hike ranging from 100-300 basis points for Pakistan, while three forecast a hold in the target rate as of Monday. State Bank of Pakistan is expected to announce the decision around 4 p.m local time.
In Sri Lanka, seven of eight economists expect the Central Bank of Sri Lanka to keep the standing lending facility rate at 16.5% at 4:45 p.m. in Colombo after a surprise increase last month, with Citigroup Inc. predicting another 100-basis-point hike.
“With fiscal policy still a little too loose in Pakistan and Sri Lanka, higher interest rates will shoulder the burden of countering inflation and establishing at least one leg of policy credibility,” said Hasnain Malik, a strategist at Tellimer in Dubai who expects further increases in both. “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.
While some relief may be in sight for Sri Lanka after securing a $3 billion International Monetary Fund loan program last month, the road to turning the troubled economy around remains rocky as debt issues hang. Pakistan is teetering on a debt default as the IMF bailout is in limbo.
In approving Sri Lanka’s loan, the IMF 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.
While price gains eased in March, they remained at about 50%, putting CBSL Governor Nandalal Weerasinghe’s forecast for the gauge to cool to “mid-single digits” by year-end at risk. The central bank, at its March meeting noted “some differences between the CBSL and IMF staff on the inflation outlook.” The bailout, said Weerasinghe, will help lower the premium the market demands when lending to the government as Sri Lanka can use part of the IMF loan for state spending.
Still, the IMF will probably want to see a “narrowing of the gap” between policy and market interest rates, according to Johanna Chua, chief economist at Citigroup Global Markets, who expects another one percentage hike on Tuesday. Sri Lanka’s three-month government bill yield hovers at about 26% against the 16.5% benchmark rate.
How Sri Lanka’s debt restructuring will turn out is a wait-and-see. While it’s set to unveil a restructuring strategy by end-April and President Ranil Wickremesinghe expects debt talks to be concluded before the IMF’s first program review in the coming months, there are ongoing issues on the extent of local creditor involvement in the exercise.
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.
What Bloomberg Economics Says...
”Pakistan is waiting on IMF aid to avoid default. The lender has required tax increases and energy-price hikes that are fueling inflation - and necessitating higher rates that will further crimp growth. More rate hikes won’t directly reduce the upward price pressure generated by the government’s austerity measures, but they should help contain inflation by suppressing second-round impacts from higher food and energy prices.” Ankur Shukla and Abhishek Gupta, economists
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.
“Policymakers will also be keen to impress the IMF, by displaying their commitment towards containing inflation, in order to secure a much-needed funding to mitigate the risk of default and raise the dangerously low level of foreign-exchange reserves,” said Shivaan Tandon of Capital Economics, which expects a 200-basis-point hike Tuesday.
