March 2 (Bloomberg) – Borrowing costs hovering at two-decade highs to quell Asia’s fastest inflation rates will be in focus in Pakistan and Sri Lanka, as the crisis-gripped economies review monetary policy settings in decisions seen as key to winning multilateral bailout funds.
The two monetary authorities are likely to take different tracks as price pressures have somewhat eased in Sri Lanka after peaking at nearly 70%, while still on the boil in Pakistan where the central bank advanced the meeting by two weeks to March 2.
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State Bank of Pakistan will on Thursday probably increase the target rate by 200 basis points to 19%, according to 28 of 38 economists surveyed by Bloomberg, with the rest expecting even higher increases ranging from 250- to 300-basis points. SBP doesn’t provide a set time for the announcement.
On Friday, the Central Bank of Sri Lanka will probably keep the standing lending facility rate at 15.5% for a fifth straight meeting, according to all eight economists in a Bloomberg survey ahead of the decision at 4:30 p.m. in Colombo. The nation’s benchmark rate is at the highest since 2001, according to central bank data.
The International Monetary Fund’s bailout — $2.9 billion for Sri Lanka and $6.5 billion for Pakistan — if approved will unlock more funding, boost foreign-currency reserves that right now can pay for less than a month of imports, and arrest a deepening turmoil.
But the loans have strings attached, such as ensuring sustainable revenue and enabling market-determined exchange rates that have led to a spate of energy price increases, tax hikes and depreciation in currencies — all of which tend to spur inflation.
Consumer prices in Colombo cooled to 50.6% in February from a year earlier. In Pakistan, price gains quickened to 31.55%, the most since the 1960’s, according to central bank data.
“Both Pakistan and Sri Lanka are well behind the inflation curve,” according to Hasnain Malik, a strategist at Tellimer in Dubai. “More rate increases and more fiscal cuts are ahead, which means further pain for the economy is in store.”
Bailout programs of the two countries have been pending for months, and in the case of Pakistan, for years.
Pakistan secured a $1.1 billion IMF loan in August, which was part of a $6.5 billion package approved in 2019. Disagreements over spending plans after last year’s devastating floods and government’s failure to meet loan conditions stalled the program. Reviving the bailout became crucial as the nation teetered on the brink of a default.
What Bloomberg Economics Says…
Pakistan is at serious risk of default. The International Monetary Fund has been dragging its feet on aid for months. And even if the IMF finally comes through, the debt won’t be sustainable unless creditors agree to large write-downs. China, Pakistan’s largest external lender, might have to accept a haircut of as much as $8 billion, by our calculations. That is high unlikely – and shows just how dire the situation is.
An IMF review last month ended without a deal for Pakistan. The government on Tuesday insisted that IMF’s loan review is progressing well and a staff-level agreement can be clinched in the “next few days.”
In the case of Sri Lanka, an IMF staff-level pact for a $2.9 billion loan program was secured at the start of September, with the board originally anticipated to approve the funds by the end of 2022. Authorities have since adjusted expectations to within this quarter.
The main reason for the delay is the absence of a formal assurance from China, also Sri Lanka’s biggest bilateral creditor, that it would support a debt restructuring for the bankrupt island nation.
While crippling supply shortages in Sri Lanka have eased, foreign currency reserves have been inching up and inflation slowing, Sri Lanka needs the IMF bailout to get more funding and turn the corner.
“Just getting into a program is not enough,” said Dhananath Fernando, the head of a Colombo-based economic think tank Advocata Institute. “Sri Lanka can also fall back like Pakistan. It has to bring long term stability and do the reforms.
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