Pakistan Predicts High Inflation and Weak Growth

Pakistan's central bank announced it would be keeping its key interest rate unchanged at 15%. This comes days after the South Asian country's credit rating was downgraded in the face of an economic catastrophe worsened by devastating floods.

Pakistan is squaring up to a balance-of-payment crisis, with foreign exchange reserves falling to little more than one month’s worth of prospective imports. This has been exacerbated by a devalued currency and consumer prices shooting up by 27%.

Ratings agency Moody's slashed Pakistan's sovereign credit rating last week to Caa1, a speculative rating with high credit risk. Moody’s pointed to external vulnerability risks and a government liquidity crisis as reasons for the downgrade.

This was the Pakistan central bank's first policy decision since floods this summer killed more than 1,700 and caused an estimated $30 billion in damage. GDP growth for the embattled nation could tumble to roughly 2% in the 2023 financial year, compared to the previous forecast of 3%-4% before the floods.

The downgrade in Pakistan's credit rating has raised concerns of the country defaulting on its sovereign debt commitments. With prices of consumer goods rising over 27% in the first quarter of 2022-23, real interest rates remain stuck in negative territory.

The central bank is warning that not only will the country have to deal with a large current account deficit, but higher food prices could raise average headline inflation. If this cocktail of factors persists, the Pakistani rupee is likely to continue to slide.