Bloomberg News

Pakistan Seeks Inflation Below 10% as Risks Threaten Growth

May 25, 2012

Pakistan will seek to reduce inflation to less than 10 percent for the next fiscal year as it grapples with the fastest pace of price increases in Asia.

The inflation goal for the 12 months starting July 1, 2012 is 9.5 percent, the prime minister’s office said in a statement in Islamabad yesterday. Earlier this month, the government projected gross domestic product will rise 4.3 percent in the period, up from 3.7 percent in the current fiscal year.

Pakistan’s economy has been hurt by blackouts, a trade deficit, diminished aid flows and an insurgency on the Afghan border. The government plans to boost spending on roads, health care and education to support growth and is due to present its last federal budget next week before elections that must be held by February.

“The economy is facing huge challenges,” said Khalid Iqbal Siddiqui, head of research at Karachi-based United Bank Ltd. “Power blackouts, reduced aid inflows and the law and order situation are the key constraints that will keep growth depressed in the next fiscal year.”

Pakistan’s rupee has weakened about 6.5 percent against the dollar in the past 12 months. Domestic risks and the threat to global growth from Europe’s debt crisis have curbed demand for the currency.

Farm output will climb 4 percent next fiscal year, up from 3.1 percent in 2011-2012, according to yesterday’s statement. The industrial sector may expand 4.1 percent, from an estimated 3.6 percent this financial year, the projections showed.

Inflation Risk

The targets were set in a meeting of the National Economic Council, which is headed by Prime Minister Yousuf Raza Gilani.

Pakistan’s inflation accelerated to an eight-month high of 11.27 percent in April, limiting scope to cut interest rates to support the $200 billion economy. The pace of price increases is the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The central bank left borrowing costs unchanged at 12 percent last month for a third straight meeting, after cutting them by 2 percentage points in 2011.

The International Monetary Fund said in February that Pakistan should broaden the tax base, curb some subsidies and curtail central bank financing of the budget deficit. It described the economy as “highly vulnerable.”

The council proposed to spend 873 billion rupees ($9.5 billion) on development projects in the year starting July 1, up 19.5 percent from 730 billion rupees in the current fiscal period. The council originally proposed expenditure of 863 billion rupees yesterday, before increasing the planned outlay by 10 billion rupees in a revised statement later the same day.

The Asian Development Bank has said the power deficit in Pakistan and damage to the cotton crop from floods last year may restrict economic growth to 3.6 percent in the year ending June.

The government will unveil the federal budget in parliament in the first week of next month, according to local media reports.

To contact the reporter on this story: Haris Anwar in Islamabad at Hanwar2@bloomberg.net.

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


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