Bloomberg News

Pakistan Reduces Key Rate, Beating Forecasts to Boost Expansion

October 08, 2011

Oct. 9 (Bloomberg) -- Pakistan’s central bank cut its benchmark interest rate by a more-than-expected 1.5 percentage points to spur investment after terrorism and floods undermined economic growth.

The State Bank of Pakistan lowered the discount rate to 12 percent from 13.5 percent, Syed Wasimuddin, a central bank spokesman, said in Karachi yesterday. Three of five economists surveyed by Bloomberg News predicted a 1 percentage point cut, and the remainder forecast a 0.5 percent reduction.

Acting Governor Yaseen Anwar had room to act and join emerging markets from Russia to Brazil in lowering borrowing costs after Pakistan’s inflation rate dropped 2 percentage points in the past three months. A rate cut might support an economy that’s seen growing less than half the pace of fellow South Asian nations India, Bangladesh and Sri Lanka this year.

“It’s a bold decision and would help prop up growth,” said Suleman Akhtar, head of research at Foundation Securities Ltd. in Karachi. “Further rate moves would depend on the extent to which the weakening rupee boosts import costs and stokes inflationary pressure.”

The Pakistan rupee has declined 1.9 percent this year and dropped to a record low on Sept. 16, prompting the central bank last month to conduct what it called a “calibrated intervention” to stabilize the currency.

Stocks, Bonds

The Karachi Stock Exchange 100 Index has fallen 1.4 percent since the start of this year, while Pakistan’s 10-year government bond yields are trading at 12.6 percent, the highest level after Greece and Venezuela, according to data compiled by Bloomberg.

Consumer prices rose 10.46 percent in September from a year earlier, after climbing 12.43 percent in July, according to the Federal Bureau of Statistics.

The central bank decided to slash its policy rate for a second straight meeting because of a “high probability” of meeting the FY12 inflation goal and to stimulate investment, according to yesterday’s statement. The State Bank is targeting an average inflation of 12 percent in the year ending June 30.

Even so, there are “upside risks” to meet the inflation target of 9.5 percent for the following fiscal year, stemming from “persistence of government borrowing” from commercial banks, exchange rate depreciation and a likely “upward adjustment” in energy costs, the statement said.

Acting Chief

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 quit on July 12. The State Bank unexpectedly cut rates in the July 30 policy decision, almost three weeks after Kardar resigned blaming state spending for fanning prices.

Anwar cited the government’s commitment to “zero borrowings” from the central bank as one of the reasons for reducing rates in July. The federal government paid back 33 billion rupees ($377 million) to the central bank this fiscal year against 238 billion rupees borrowing in the same period a year ago, according to the central bank.

“Any reduction in interest rates would benefit our plans to expand capacity,” Taha Hamdani, Karachi-based chief financial officer at Thatta Cement Co., said before the report. The company plans to spend 3 billion rupees in the next two years to double production to 3,000 tons a day.

Policy makers in Pakistan are aiming to boost economic growth to 4.2 percent in the fiscal year ending June 30, from 2.4 percent in the previous year, one of the lowest expansions in the past decade, as the country struggled to cope with floods and militant attacks.

Floods, Terrorism

Floods in August forced more than one million people from their homes and damaged crops in parts of southern Pakistan still recovering from last year’s worst ever monsoon inundations that devastated the region. Terror attacks in the South Asian nation have killed at least 35,000 people since 2006, according to government estimates.

Foreign direct investment in Pakistan fell 40 percent to $112.4 million in the first two months of the fiscal year that started July 1 from a year earlier. By contrast, India, from which Pakistan was partitioned in 1947 following independence from British rule, got $13.4 billion in the three months through June, a quarterly record.

As Pakistan’s relations with the U.S., its biggest donor, frayed since Navy Seals killed al-Qaeda leader Osama bin Laden in a unilateral raid on May 2, China has emerged as a key ally, according to Saleem H. Mandviwalla, the chairman of the government’s Board of Investment.

“Pakistan needs to fire on all cylinders to support growth,” said Farid Aliani, a Karachi-based analyst at BMA Captial Ltd. “Easing monetary policy would help.”

--With assistance from Farhan Sharif in Karachi. Editors: Cherian Thomas, Dick Schumacher

To contact the reporter on this story: Farhan Sharif in Karachi, Pakistan at fsharif@bloomberg.net

To contact the editor responsible for this story: Dick Schumacher at dschumacher@bloomberg.net


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