Bloomberg News

Pakistan Holds Key Rate as Surging Prices Add to Growth Threats

April 13, 2012

Pakistan left interest rates unchanged for a third meeting as it struggles to damp inflation exceeding 10 percent and counter growth threats from sliding exports, a budget deficit and security risks.

The State Bank of Pakistan kept the discount rate at 12 percent, Syed Wasimuddin, a central bank spokesman, said in Karachi yesterday. All 11 economists surveyed by Bloomberg News predicted the outcome.

Pakistan joins Indonesia and South Korea in holding borrowing costs this week after a climb in crude oil prices and a 7.3 percent slide in the rupee against the dollar in the past year fanned inflation. The nation is grappling with blackouts from its worst energy crisis, diminished aid flows, political tensions before general elections due by February and an insurgency on the Afghan border.

“There was no room to ease policy,” Khalid Iqbal Siddiqui, head of research at United Bank Ltd. in Karachi, said before the decision. “Inflation demands a cautious approach. But, with an election in sight, government spending is likely to go up and there may be less scope for tough decisions like raising rates.”

Pakistan’s rupee weakened 0.3 percent to 91.04 per dollar as of 5 p.m. local time yesterday. The currency has been under pressure on concern dwindling international aid and a trade deficit will sap foreign-exchange reserves.

“The primary consideration remains bringing inflation further down as it has persistently remained in double digits in the last few years,” the central bank said in yesterday’s monetary policy statement. It raised the minimum rate of return required to be paid on bank deposits to 6 percent from 5 percent to help promote savings.

Budget Deficit

Inflation held at close to a six-month high in March, with consumer prices rising 10.8 percent from a year earlier. That’s the fastest pace after Vietnam in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

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, the International Monetary Fund said Feb. 6. Monetary policy is “too accommodative,” it said.

The $200 billion economy cut rates by 2 percentage points last year to spur growth after floods sapped expansion, before pausing reductions in November. Governor Yaseen Anwar said March 2 the central bank aims to bolster lending to small companies, farming and housing in the next three years.

Debt Crisis

Europe’s debt crisis has also dimmed the outlook by crimping exports, with overseas shipments tumbling 18.8 percent in March from a year earlier, the most since 2009.

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 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.

Relations between the countries have been further strained by a November border attack by American helicopters that killed 24 Pakistani soldiers.

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 government estimates.

Pakistan’s economy grew 2.4 percent in the fiscal year through June 2011, one of the smallest expansions in a decade. The IMF estimates it will expand 3.4 percent in 2011-2012.

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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