Daily Times

The South Asian nation is trying to navigate a tricky path to economic recovery under a caretaker government in the wake of a $3 billion International Monetary Fund (IMF) loan programme, approved in July, which helped avert a sovereign debt default.

Reforms set out as conditions for the loan have complicated the task of keeping price pressures and declines in the rupee in check. An easing of import restrictions and the removal of subsidies — both conditions of the bailout — have fueled spikes in energy prices.

Although overall inflation fell slightly to 27.4% in August, food inflation remains elevated at 38.5%.

The rupee has also slid to all-time lows, falling 6.2% in the last month alone, although it has recovered some ground in recent days after a crackdown on illegal foreign exchange transactions.

“The recent currency depreciation is also a key reason why another rate hike is likely, especially since the use of foreign-exchange reserves which are still very low is not a viable option,” said Shivaan Tandon, economist at Capital Economics.

He added that while import controls have been relaxed, the move has pushed the current account back into a deficit, which pushes up the costs of imports and paying debt.

“Since import controls are no longer an option as well, due to the IMF agreement, policymakers may have to resort to tighter monetary policy to curtail demand and rein in the deficit,” he said.

Pakistan’s central bank said in July that it expects inflation to be on a downward path over the next 12 months.

Analysts also noted that rises in cut-off yields in treasury bill auctions — the highest yield at which a bid is accepted — indicate that market participants expect a rate hike.