By Ariba Shahid
KARACHI, Pakistan (Reuters) - Pakistan must continue its monetary tightening cycle, the International Monetary Fund (IMF) said in a staff report on Tuesday, a week after the lender approved a new bailout arrangement and less than two weeks before the country's central bank holds its next policy meeting.
"The recent policy rate hike is welcome, but the tightening cycle should continue if needed to reduce inflation and facilitate external rebalancing," the staff report said.
Pakistan's central bank held an emergency meeting last month, a day after the country revised its budget for the fiscal year, in line with the demands of IMF to secure a stalled tranche from the now expired Extended Fund Facility (EFF). Instead, Pakistan was able to get a $3 billion lifeline in the form of a standby arrangement.
The State Bank of Pakistan (SBP) has raised its key policy rate by 12.25 percentage points since April 2022, mainly to curb soaring inflation. The next monetary policy meeting is scheduled for July 31.
The staff report added that in the short term, the forward-looking real policy rate should return to positive territory to re-anchor expectations and achieve the SBP's inflation objective over the medium term.
In the Memorandum of Economic and Financial Policies (MEFP) that resulted from its talks with the IMF, Pakistan said it stands ready to consider further action at the next monetary policy committee meeting and subsequent ones until inflation and inflation expectations are on a clear downward path.
It added that the exact pace of future adjustments depends on inflation data, exchange-rate developments, the strength of the external position, and the fiscal-monetary policy mix.
"To this end, we will aim to ensure that the real policy rate returns to positive territory on a forward-looking basis to signal our commitment to bring inflation within the target band within FY26," the MEFP read.
Pakistan's government has forecast inflation at 21% for fiscal 2024.