Pakistan Cuts Rate a Second Meeting to Support Faltering Economy

Pakistan cut its benchmark interest rate for a second meeting to support a faltering economy after inflation eased to the lowest level in almost three years.

The State Bank of Pakistan lowered the discount rate to 10 percent from 10.5 percent, spokesman Syed Wasimuddin told reporters in Karachi yesterday. Eight of 16 economists in a Bloomberg News survey predicted the decision. One expected no change, another a reduction to 9.75 percent, five a move to 9.5 percent and one a cut to 9 percent.

Power blackouts, an insurgency on the Afghan border and a drop in exports amid faltering global growth have added to the case for steps to support expansion. The central bank’s move comes after inflation cooled to 8.79 percent last month, the lowest level since December 2009, and adds to a 1.5 percentage- point reduction in borrowing costs in August.

“We expect more rate cuts ahead,” Sukhy Ubhi, an economist at Capital Economics Ltd. in London, said in a note. “Pakistan’s poor government finances means that fiscal policy has little room for maneuver. Instead, the government is likely to put political pressure on the SBP to support the economy ahead of next year’s election. We have pencilled in another 50 basis points of policy loosening at the December meeting.”

Pakistan’s rupee has weakened about 8.6 percent against the dollar in the past year, hurt by risks including a current- account gap, while the Karachi Stock Exchange 100 Index (KSE100) is up 33 percent after companies such as banks reported higher profits.

Moderating Inflation

“A consistent decline in inflation since May is more than earlier estimates,” the central bank said in its monetary policy statement. “Despite an expected uptick in the second half of the fiscal year, the overall inflation outlook has improved.”

The rate cut is a “populist decision” ahead of a general election due by early 2013, said Farrah Marwat, head of Research at JS Global Capital Ltd. in Karachi.

Pakistan needs to repay billions of dollars to the International Monetary Fund, signaling pressure on foreign reserves. A partially disbursed, $11.3 billion IMF loan program expired in September 2011.

The nation hasn’t requested a fresh loan, Jeffrey Franks, the IMF’s mission chief to Pakistan, said at a briefing in Islamabad on Oct. 3.

Inflation may rise to double digits by mid-2013 unless monetary financing of the budget deficit is reversed, and the shortfall may exceed the government’s target for this fiscal year, Franks said in a statement on Oct. 4.

The administration’s goal is a gap of 4.7 percent of gross domestic product in the year that began July 1.

Ratings Cut

Pakistan has to repay about $7.5 billion to the Washington- based lender from 2012 to 2015, with $1.2 billion of that amount handed over as of June, Moody’s Investors Service said in July, when it cut Pakistan’s credit rating deeper into junk status on falling reserves and political instability.

Asian nations from India to South Korea are due to decide on borrowing costs this month as Europe’s debt crisis hurts demand for the region’s exports, increasing pressure for rate cuts to bolster spending and investment at home.

Pakistan’s government has a goal of 4.3 percent economic growth in the year ending June, even as power blackouts as long as 18 hours a day hamper businesses.

The IMF estimates GDP will rise 3 percent to 3.5 percent this financial year. The nation needs faster growth to absorb an expanding workforce, according to the multilateral body.

The latest rate cut may not spur lending, a pattern evident after August’s reduction, said Ayaz Mahmood, the chief financial officer of Honda Atlas Cars Pakistan Ltd. in Lahore.

“People are just not ready to borrow amid the energy shortage,” he said.

To contact the reporters on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net Khurrum Anis in Karachi at kkhan14@bloomberg.net

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

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