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By Asif Shahzad
ISLAMABAD, July 16 (Reuters) – Pakistan’s central bank raised its main policy rate by 100 basis points on Tuesday to 13.25%, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.
The increase follows this month’s accord with the International Monetary Fund on a $6 billion loan package that comes with tough conditions aimed at cutting Pakistan’s substantial fiscal and current account deficits and bolstering its shrinking currency reserves.
State Bank of Pakistan Governor Reza Baqir said the decision to raise rates took into account upside inflationary pressures and the impact from recent increases in utility prices.
The central bank has now increased its main policy rate nine times since the beginning of last year, raising it by a total of 750 basis points as it has struggled to control inflation, a widening fiscal deficit and pressure on the rupee currency.
Inflation eased slightly last month to 8.9% but Baqir said he expected pressures to continue.
Under the bailout accord, the IMF said it expected “appropriately tight monetary policy” would bring inflation down to 5-7% in the medium term.
With slowing growth, a budget deficit that has climbed to more than 7% of gross domestic product and currency reserves of little more than $7 billion, Pakistan has been struggling to ward off a debt and balance of payments crisis for more than a year.
After initial reluctance, Prime Minister Imran Khan’s government turned to the IMF for support and finalised a $6 billion loan agreement this month that will unlock an additional $38 billion in loans from other international partners.
The three-year agreement for Pakistan’s 13th IMF bailout since the late 1980s, has seen a sharp drop in the value of the rupee after the central bank agreed to a “flexible, market-determined exchange rate”.
The accord also foresees structural economic reforms and a widening of the tax base to boost Pakistan’s chronically weak tax revenues. (Reporting by James Mackenzie and Asif Shahzad Editing by Richard Borsuk, Robert Birsel)