KARACHI: Despite the agreement clinched with the International Monetary Fund last week, the financial sector is not sure about the future trends in interest rate as inflation is expected to shoot up, while political uncertainties are taking more space in the current economic scenario, according to sources in the market.

“The staff -level agreement (SLA) with the IMF for $7bn is expected to get final approval soon, but the budgetary measures and frequent hikes in electricity rates will surely push up inflation, which slowed to 12.6 per cent last month,” said a senior banker.

Bankers and financial experts believe the interest rate would come down slowly and as to wait for the inflation to go up as it increased in June to 12.6pc from 11.8pc in May.

Bankers said the Karachi Inter Bank Offered Rate (Kibor) also reflects the trend as the benchmark six-month offered rate was slightly below the interest rate.

The Kibor holds a prominent position in the country’s financial market. It is determined on the demand and supply of credit within commercial banks. It serves as a crucial benchmark interest rate governing lending transactions among banks within the interbank market.

Political uncertainty, inflation emerge as key hurdles to economic growth

The last offered rate, as reported by the State Bank on July 12 for six months, was 19.95pc — slightly below the interest rate of 20.50pc.

Kibor had been an indication of high interest rate in the outgoing fiscal year and the six-month benchmark rate reached as high as 25pc in September last year. It remained at a level that was much higher than the policy interest rate of 22pc.

“On one hand, the agreement with IMF will help bring stability to the economy, but on the other the political uncertainty is set to emerge as the main hurdle holding the economy back,” said the banker.

The financial sector felt that the government’s latest move to ban a political party in the country would only add fuel to the fire.

“The uncertainty will surely eat up any chance for the economy to pick up,” said Amir Aziz, an exporter and manufacturer.

He said the interest rate had already crushed prospects of economic growth and the large-scale manufacturing sector has yet to recover.

“We are not accepting export orders since the cost of production has gone up with the prevailing interest rate, while inflation is still chasing goods and services to increase the prices,” he said.

In FY24 inflation was 23.4pc and has a potential to stop any big cut in interest rate while it may spur the CPI to rise in the coming months. The annual inflation in FY23 was 29.2pc.

“The interest rate relation with inflation is still not clear for the financial sector and it is not able to take long-term stance for this uncertain situation,” said S.S. Iqbal, a money market dealer.

He said banks would the government would remain dependent on banks for liquidity as it borrowed Rs3.2tr in the last 45 days of FY24.

A report of JS Research, released on Monday, said the key to the new agreement is the proposed tax on agricultural income. According to World Bank estimates, the tax on agricultural income would raise $20bn in additional revenue in FY25.

Published in Dawn, July 16th, 2024