(Updates with currency in fifth paragraph.)
Aug. 1 (Bloomberg) -- Pakistan’s unexpected interest-rate cut, almost three weeks after a governor resigned blaming state spending for inflation, shows the pressure the central bank faces from the government to reduce borrowing costs.
The State Bank of Pakistan lowered the discount rate to 13.5 percent from 14 percent, Acting Governor Yaseen Anwar said at a news conference in Karachi on July 30, citing a slower inflation forecast for the move. None of the 11 economists in a Bloomberg News survey predicted the decision.
Anwar said the government has committed to “zero borrowings” from the central bank and its access to funds from commercial lenders needs to be “monitored closely to assess potential risks.” Growing public debt and living costs have fanned Pakistan’s 10-year government bond yields to the highest level after Greece, according to data compiled by Bloomberg.
“There can be political pressure on the central bank since it is still not empowered by law to make independent decisions,” said Saad Khan, a Karachi-based economist at brokerage Arif Habib Ltd. “The government wanted interest rates to come down which was contradictory to the central bank’s stance throughout the last fiscal year.”
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, which has weakened 1 percent in the period, fell 0.1 percent to 86.65 against the dollar at 10:40 a.m. in Karachi.
Prime Minister Yousuf Raza Gilani’s government named Anwar, a deputy governor since March 2007, as the central bank’s acting chief after Shahid Kardar resigned on July 12.
Average inflation in the year that began July 1 is forecast to be 11 percent or 12 percent, Anwar said, compared with 13.92 percent in the previous year. 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.
Kardar blamed increased government borrowing for inflation 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.
Kardar said his differences with the government were impeding the central bank’s autonomy and ability to ensure “prudent” monetary decisions. Moody’s Investors Service said his exit underscores the “discord” in policy leadership.
The government has “expressed its commitment to continue with a stance of zero borrowings from SBP in yearly flow terms in FY12, which bodes well for anchoring inflation expectations,” according to a statement from the central bank. Even so, the “the developments related to expected financial inflows and pattern of government borrowings from scheduled banks will need to be monitored closely to assess potential risk for macroeconomic stability,” the statement showed.
The government didn’t borrow from the central bank in the year ended June 30, 2011 and relied on commercial banks for funds, according to the central bank statement.
Government borrowing from commercial lenders more than doubled to 589 billion rupees ($6.8 billion) in the last fiscal year, from the previous 12 months, according to the central bank.
While Gilani’s coalition 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.
Anwar “underscored the need to accelerate the implementation of fiscal reforms currently being considered by the government,” according to the monetary policy statement. “Broadening of the tax base” is “urgently required,” it said.
Gilani wants lower borrowing costs to help spur Pakistan’s economy, which 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 July 26 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,” 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 interest rates going down.”
Prime Minister Gilani is also counting on resumed disbursements from the International Monetary Fund to help finance spending.
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. 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.
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 from Haris Anwar in Islamabad. Editors: Cherian Thomas, Indranil Ghosh
To contact the reporters on this story: Haris Anwar in Islamabad, Pakistan at firstname.lastname@example.org Farhan Sharif in Karachi, Pakistan at Fsharif2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at email@example.com