Bloomberg News

Pakistan Holds Rate as Price Surge Curbs Scope to Aid Growth

February 13, 2012

Feb. 12 (Bloomberg) -- Pakistan’s central bank left interest rates unchanged for a second meeting as the fastest inflation in Asia after Vietnam curbs scope to ease policy and bolster growth.

The State Bank of Pakistan kept the discount rate at 12 percent, Governor Yaseen Anwar said at a news conference in Karachi yesterday. Eight of 11 economists in a Bloomberg News survey predicted the decision. Two expected a cut to 11.5 percent and one to 11 percent.

Pakistan, which joins South Korea and Australia in holding rates this week, faces inflation exceeding 10 percent, faltering growth following floods in 2010 and 2011 and an insurgency near the Afghan border. The disasters, security risks, elevated price pressures and a budget shortfall have left the economy “highly vulnerable,” the International Monetary Fund has said.

“It is prudent to take this cautious approach,” Saad Khan, an economist at Arif Habib Ltd. in Karachi, said after the announcement. “There are inflationary pressures, fiscal deficit issues and high government borrowing.”

Yesterday’s decision contrasts with Indonesia, which lowered borrowing costs unexpectedly by a quarter point two days ago. Pakistan’s central bank cut rates by 2 percentage points in 2011, joining nations such as China in easing monetary policy as Europe’s debt crisis hampered global expansion. The State Bank subsequently paused in November.

“Inflationary pressures have not eased significantly enough,” Anwar said yesterday. “A sustainable economic recovery calls for increased domestic and foreign investment for which business confidence needs to be revived.”

Inflation Quickens

Pakistani inflation accelerated to 10.1 percent in January, the second-fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg, from 9.75 percent in December.

Government borrowing rose 25.8 percent to 440 billion rupees ($4.9 billion) from July 1 to Feb. 3, Anwar said.

The Pakistan rupee is down about 6 percent against the dollar in the past year on concern foreign reserves will shrink as international aid dwindles. A continuing decline in the reserves “would be credit negative,” Moody’s Investors Service said this week. Reserves stood at $12.2 billion on Feb. 9, according to the central bank.

Political risks have also deterred investors, with Prime Minister Yousuf Raza Gilani facing a contempt-of-court charge that threatens to force him from office.

Broader Tax Base

The IMF said Feb. 6 Pakistan should broaden the tax base, curb some subsidies and curtail central bank financing of a budget gap that may rise to 7 percent of gross domestic product in the fiscal year ending June. Monetary policy is “too accommodative,” it said.

An $11.3 billion IMF loan to Pakistan expired in September, with disbursements suspended in May 2010 after the country failed to meet conditions attached to it. The lender forecasts GDP will rise 3.4 percent in the fiscal year through June.

The U.S., the country’s largest export market and aid provider, held back $800 million in military assistance in July out of $2 billion pledged for this fiscal year because of disputes over how to combat terrorism.

Floods in August forced more than 1 million people from their homes, while militant attacks have killed at least 35,000 people since 2006, according to estimates from the government.

The $175 billion economy grew 2.4 percent in the year through June 2011, one of the smallest expansions in a decade.

--Editors: Sunil Jagtiani, Naween A. Mangi

To contact the reporter on this story: Farhan Sharif in Karachi at Fsharif2@bloomberg.net

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


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