KARACHI - State Bank of Pakistan (SBP) is likely to trim the policy discount rate by another 100 basis points in the upcoming monetary policy review ahead of macroeconomic changes and IMF tax and treasury reforms. SBP intends to revise monetary decisions in a phased manner, therefore, it is expected that in the forthcoming monetary policy statement, which is scheduled to be announced in the last week of September, the central bank will reduce discount rate by 50bps followed by another 50bps decrease in interest rate by end November 2009. In its second review and staff report under the Stand-By Arrangement, IMF has recommended the Federal Government to remain policy interest rate on hold until core inflation shows a further steep decline. From peak 18.9 per cent core inflation has reduced to 14 per cent in July and is likely to contract further on the back of weak domestic economy. Given the non-compliance of tax, treasury and electricity reforms, analysts believe, IMF has provided a last chance to the government. However, we understand the electricity and tax reforms, if implemented should help to restore fiscal space and in turn the macro economy in the medium term. The treasury reforms are likely to stress the system liquidity and may keep the inter-bank borrowing rate in the tight range. These reforms should increase the inflationary expectation and keep central bank vigilant in the medium term. Meanwhile, IMF in a staff report stated that despite shortcomings in policy implementation, IMF believes Pakistans economy has continued to stabilise. The quantitative performance is inline with targets except for the fiscal deficit target, which was missed by a big margin. The implementation of structural conditionalities remained weak on grounds of political and systematic considerations during the quarter ending in June. Even then, IMF has accepted the authoritys request for augmentation of 200 percent quota on grounds of governments commitment of pressing ahead with tax, electricity and treasury reforms. IMF says government has failed to submit a comprehensive plan for eliminating the inter-corporate circular debt, which is also reflected in the breach of agreement with World Bank and ADB on electricity tariff adjustments by June 30th. IMF further said significant unspent accounts outside the Federal Consolidated Funds are reflected with commercial banks, implying that the transition is not yet complete. Following the World Banks technical assistance in July 2009, the remaining balances with commercial banks will be surveyed. Moreover, identified government balances with commercial banks will be transferred to the TSA by end-June 2010, subject to an assessment of the impact on the banking sector.