Bloomberg News

Pakistan Keeps Rates on Hold to Spur Growth as Investment Drops

December 01, 2011

Dec. 1 (Bloomberg) -- Pakistan’s central bank left interest rates unchanged, pausing to gauge the impact of a 2 percentage- point cut since the end of July as foreign investment declines.

The State Bank of Pakistan kept the discount rate at 12 percent, Syed Wasimuddin, a central bank spokesman, said in Karachi yesterday. Eight of 14 economists surveyed by Bloomberg News predicted the decision while the remainder expected a 0.5 percentage point reduction.

Emerging markets from Indonesia to Thailand have eased monetary policy to support consumer demand as Europe’s debt crisis threatens a global economic slump. A 3 percentage-point drop in the inflation rate this year has boosted Governor Yaseen Anwar’s scope to bolster Pakistan’s expansion.

“The central bank’s stance is to support growth, though it’s being cautious to relax rates more,” said Saad Khan, an economist at Arif Habib Ltd. in Karachi. “Any further cut would depend on the rupee and government borrowings.”

The Pakistan rupee has weakened 3.2 percent against the U.S. dollar this year, risking higher import costs. The currency declined 0.5 percent to 88.69 against the greenback at the close in Karachi yesterday. The Karachi Stock Exchange 100 Index advanced 0.2 percent.

‘Macroeconomic Risks’

“A reassessment of latest developments and projections indicate that macroeconomic risks have somewhat increased during the last two months,” the central bank said in a statement yesterday. For instance, the month-on-month inflation trend show the existence of price pressures, and one of the main drivers of inflation is government borrowing, according to the statement.

Government borrowings from the central bank and commercial lenders since July 1 more than doubled to 712 billion rupees ($8 billion) as of Nov. 11 compared with a year earlier, according to the central bank.

Consumer prices rose 11 percent in October from a year earlier, less than the 14 percent gain in January, according to the Islamabad-based Federal Bureau of Statistics.

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

Foreign direct investment in Pakistan fell 28 percent to $340.2 million in the four months through October compared with a year earlier.

Slower Growth

The growth rate may be 0.5 percentage point lower than the government target of 4.2 percent for the current fiscal year, a finance ministry official said Oct. 19 in a briefing, citing the impact of floods in the country.

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.

“Pakistan needs to lower borrowing costs further to encourage investment and demand,” Ruhail Mohammed, chief financial officer at Engro Corp., a Pakistani maker of fertilizer, dairy products and plastics, said before the decision. “This is what regional and other economies are doing to encourage business activity and growth.”

In Asia, Thailand cut borrowing costs yesterday, while Indonesia reduced its reference rate on Nov. 10.

The State Bank cut rates by half a percentage point at its policy decision on July 30. On Oct. 8, it reduced the discount rate by a more-than-expected 1.5 percentage points.

--With assistance from Manish Modi in New Delhi Editors: Cherian Thomas, Simone Meier

To contact the reporter on this story: Farhan Sharif in Karachi, Pakistan at fsharif2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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