Pakistan Cuts Key Rate to 5-Year Low as Power Crisis Hits Growth

Pakistan cut its benchmark interest rate to the lowest level in five years as policy makers seek to stimulate an economy battered by an energy crisis and insurgency that is likely to need more International Monetary Fund aid.

The State Bank of Pakistan reduced the discount rate by 50 basis points to 9.5 percent, Syed Wasimuddin, spokesman, told reporters in Karachi yesterday. The decision was predicted by 14 of 15 economists surveyed by Bloomberg News. One saw no change.

Pakistan’s economy will probably expand 3.5 percent in the 12 months through June, the IMF forecast Nov. 29, less than the 4.3 percent predicted by the government. Fighting with militants along the nation’s northwest border is sapping the budget and undermining confidence among businesses that are already struggling with record power outages that have shut factories and left thousands of people jobless.

“Pakistan is likely to go back to the IMF for another loan next year,” Hamad Aslam, head of research at Lakson Investments Ltd in Karachi who predicted yesterday’s decision, said before the announcement.

Pakistan is scheduled to repay about $7.5 billion to the Washington-based IMF between 2012 and 2015, with $1.2 billion due in June. A partially disbursed $11.3 billion loan program expired in September 2011.

The central bank’s reduction reflects inflation slowing to a 41-month low of 6.93 percent in November. Today’s cuts add to 2 percentage points of easing since August. The new rate will be effective from Dec. 17.

Muted Credit

“Deceleration in inflation is faster than the projected path and credit extended to private businesses remains muted,” the State Bank said in its monetary policy statement yesterday. Average inflation for the year ending June will be below the 9.5 percent target, it said.

While the central bank has scope for a larger cut, it may opt for a conservative approach amid IMF repayments, Uzma Taslim, an analyst at Alfalah Securities Pvt. Ltd. in Karachi, said before the announcement.

The rupee traded at a record high against the dollar this week, after falling 9 percent earlier this year.

“Government finances are also under pressure,” Moody’s Investors Service said in November. “The budgeted deficit of 4.7 percent for the year ending June is likely to see slippage due to optimistic revenue and expenditure assumptions.”

Pakistan recorded the highest budget deficit in two decades in the fiscal year ended June.

To contact the reporter on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net

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

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