July 30 (Bloomberg) -- Pakistan’s central bank unexpectedly cut interest rates, almost three weeks after its governor resigned blaming state spending for price pressures in a nation with the second-fastest inflation in Asia.
The State Bank of Pakistan decreased the discount rate to 13.5 percent from 14 percent, Acting Governor Yaseen Anwar said at a news conference in Karachi, adding that the government’s commitment to zero borrowing prompted the reduction. None of the 11 economists in a Bloomberg News survey predicted today’s decision.
Shahid Kardar’s departure as central bank chief July 12, the second person to quit the post in about a year, had threatened to expose a breakdown in policymaking, undermining efforts to revive growth amid rising costs and terrorism. The risks fanned Pakistan 10-year government bond yields to the highest level after Greece among debt markets tracked by Bloomberg.
“It’s a risky decision,” Khurram Schehzad, head of research at Invest Capital Market, said after the announcement. “I don’t think the government will reduce its borrowings given the size of the fiscal deficit. Pakistan needs to tackle inflation to get growth back on track.”
Pakistan’s 10-year government bond yields have climbed 1.04 percentage points in the past year to 13.95 percent, compared with 14.12 percent in Greece, according to Bloomberg data. The currency weakened 1 percent to 86.50 per dollar in the period.
Kardar said his differences with the government were impeding the central bank’s autonomy and ability to ensure “prudent” monetary decisions, and Moody’s Investors Service said his exit underscores the “discord” in policy leadership.
Jaffer Qamar, the chief economist at the Planning Commission of Pakistan and the government’s Auditor General Tanvir Ali Agha also resigned this month. Shaukat Tarin quit as finance minister in February 2010, becoming the third person at the time to relinquish charge of the ministry in two years. Kardar had replaced Syed Salim Raza, who left in June 2010.
Prime Minister Yousuf Raza Gilani’s government named Anwar, a deputy governor since March 2007, as the central bank’s acting chief.
Average inflation in the year that began July 1 is forecast to be 11 or 12 percent, Anwar said today, lower than 13.92 percent in the year ended June 30.
Kardar blamed increased government borrowing for price gains and kept the central bank’s policy rate, one of the highest in the world, unchanged since January this year after raising it in September and November by half a percentage point each to slow inflation. He cited “difference of opinion on policy actions” for his resignation.
“The independence of a central bank is crucial, more so in challenging economic conditions,” Saad Khan, a Karachi-based economist at Arif Habib Ltd., a brokerage firm, said before the report. “The biggest challenge the new governor will face is to keep pushing for a limit on government borrowing and that may not be very pleasant for a lot of people.”
Government borrowing rose 58 percent to 716 billion rupees ($8.3 billion) in the last fiscal year from the previous 12 months, according to the central bank.
Consumer prices in Pakistan climbed 13.1 percent in June, the most after Vietnam, among the 17 nations in the Asia Pacific tracked by Bloomberg.
While Gilani’s government has pledged to narrow the budget deficit to a seven-year low of 4 percent of gross domestic product in the year ending June 30, 2012, it hasn’t yet enacted a law that would limit borrowings from the central bank. The gap in the year ended June 30 was 6.2 percent.
Pakistan’s economy probably expanded 2.4 percent in the year ended June 30, slower than an earlier target of 4.5 percent.
Honda Atlas Cars Pakistan Ltd., the nation’s third-biggest carmaker, said this week sales fell 18 percent last quarter, a sign that consumer demand remains weak in the South Asian nation.
“A higher interest-rate environment increases the cost of doing business,” and hurts growth, Imran Anwar, chief financial officer of Engro Foods Ltd., Pakistan’s biggest maker of packaged milk, said in a July 29 e-mail in response to questions from Bloomberg News. “We certainly want to see rates going down. At the same time, we also want to see inflation in single digits.”
The loss of key economic managers may undermine the credibility of Gilani’s government as it seeks aid resumption from the International Monetary Fund.
The IMF told Pakistani officials in May that the government needs to keep cutting the deficit to take pressure off monetary policy and allow more credit to companies. The Washington-based fund stopped disbursing money to Pakistan in May 2010 after the country failed to meet conditions attached to an $11.3 billion loan first issued in 2008.
Pakistan’s $162 billion economy is lagging behind emerging markets including India and China, which helped lead the global economic rebound from the deepest postwar recession. Pakistan’s expansion has also been weakened by a Taliban insurgency and record floods in 2010.
The floods destroyed $3.3 billion of crops, according to government estimates. The nation’s military has stepped up its fight against insurgents in the northwest after al-Qaeda leader Osama bin Laden was killed by U.S. troops in Abbottabad on May 2. At least 35,000 Pakistanis have been killed in terrorist attacks in the last decade, according to the government.
--With assistance by Haris Anwar in Islamabad. Editors: Cherian Thomas, Naween A. Mangi
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