Pakistan's Central Bank Keeps Borrowing Costs Unchanged on Inflation

The State Bank of Pakistan kept borrowing costs unchanged, maintaining one of the world’s highest benchmark interest rates, in an economy hurt by inflation, terrorism and falling foreign investment.

Pakistan’s central bank held its discount rate at 12.5 percent, according to a statement released in Karachi today. The central bank’s decision was in line with all 17 estimates in a Bloomberg News survey.

Pakistan, where terrorist attacks claimed 3,000 lives in 2009, needs low borrowing costs and foreign aid to support growth and create jobs, according to Prime Minister Yousuf Raza Gilani’s government. Economists say central bank Governor Syed Salim Raza may be compelled to raise interest rates on inflation concerns.

“There is a mounting pressure on the central bank to tighten monetary policy,” said Sayem Ali, an economist at Standard Chartered Pakistan Ltd. in Karachi. “Consumer prices have shot up in recent months due to a cutback in energy subsidies and heavy deficit-financing by the central bank.”

Inflation accelerated to a three-month high of 13.26 percent in April, according to the Islamabad-based Federal Bureau of Statistics. Prices rose after Pakistan raised domestic gas prices by as much as 5.4 percent on April 1.

Current Stance

“With inflation on the rise and the fiscal position not responding to the current monetary policy stance, the State Bank will closely monitor developments to ensure stability of aggregate prices and support the nascent recovery of private economic activity,” the central bank said in today’s statement.

Constrained by high borrowing costs, the South Asian nation is seeking aid from The Friends of Democratic Pakistan, a group of donors that includes the U.S., U.K., Japan and Saudi Arabia, to revive an economy that grew 2 percent in the year ended June 30, the least since 2001.

Delays in the release of a $5.3 billion grant pledged by the group in April 2009 have forced the government to tap funds from the central bank, stoking inflation. Government borrowings from the State Bank of Pakistan rose 14.5 percent to 365.9 billion rupees ($4.3 billion) in the 10 months to April from a year earlier, according to the central bank.

Heavy Borrowings

“The need for heavy government borrowings for budgetary support emanates from the unsustainable equation of revenue and expenditure and uncertain external borrowings,” the central bank said today. The government may miss its tax collection target of 1.38 trillion rupees in the year ending June 30, according to the statement.

The Federal Board of Revenue has collected 1.03 trillion rupees in taxes in the first 10 months of the current fiscal year.

Pakistan’s discount rate is the highest among the benchmark interest rates of 53 central banks tracked by Bloomberg. Lebanon’s repurchase rate is the second-highest at 12 percent, the data show.

Raza has kept the central bank’s benchmark rate unchanged for the third time this year after cutting it three times in 2009 by 2.5 percentage points.

If interest rates start to increase, it will boost operating costs at companies and impede expansion plans, said Farhan Bashir, research analyst at Invest Capital & Securities Ltd., in Karachi.

Cost of Debt

D.G. Khan Cement’s cost of servicing its debt currently exceeds the company’s operating profit, according to Invest Capital & Securities. The company, the nation’s second-biggest maker of building material, posted a net loss of 47.4 million rupees for the quarter ended March 31.

Engro Corp., a Pakistani conglomerate, plans to invest $5 billion in the next five years in power generation and food exports, and potassium fertilizers, Chief Executive Officer Asad Umar, said in an interview in October.

The South Asian economy needs to grow at an average annual pace of 6 percent to reduce poverty, according to the government.

Foreign direct investment in Pakistan dropped 44.7 percent to $1.77 billion in the first 10 months of the fiscal year ending June 30, central bank data showed, as militants retaliated to the Pakistan army’s offensive against Taliban fighters in the country’s northwestern region.

Pakistan received a $7.6 billion loan from the International Monetary Fund in 2008 to avoid defaulting on its overseas debt. The credit agreement was increased to $11.3 billion last year.

Pakistan may turn to the IMF for a second loan to make up for a shortage of money with the government, the nation’s Finance Adviser Abdul Hafeez Shaikh said May 12. Shaikh, a former minister under military ruler Pervez Musharraf, was named the finance adviser on March 18 to replace Shaukat Tarin, who resigned as the nation’s finance minister in February.

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

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