Pakistan increased its benchmark interest rate for the first time in almost three years, shifting course after the International Monetary Fund approved a loan last week to help stabilize the nation’s struggling economy.
The discount rate was increased to 9.5 percent from 9 percent, a seven-year low, State Bank of Pakistan Governor Yaseen Anwar said at a news conference in Karachi yesterday. Five of 20 analysts predicted the decision in a Bloomberg News survey. The rest saw no change.
The IMF called for a tighter monetary policy to contain inflation and rebuild reserves in approving a $6.6 billion loan to help the South Asian nation avoid a balance-of-payments crisis. Prime Minister Nawaz Sharif’s four-month-old government is also struggling to end a Taliban insurgency and ease power shortages that have slowed growth in the $231 billion economy.
“Inflation has shot up,” Tariq Hussain Khan, research head at Pearl Securities Ltd., said before the decision. “You have to act fast on inflation if you want to achieve the fiscal deficit target.”
Pakistan’s central bank had reduced the policy rate by 500 basis points since last raising it in November 2010, including a half-percentage-point cut three months ago. Consumer prices rose 8.55 percent in August from a year earlier, which was fastest pace in 11 months while staying below last year’s average of 9.73 percent, according to data compiled by Bloomberg.
“This accommodative policy did not bear fruit in terms of private sector stimulus,” the IMF said in a statement Sept. 12, referring to rate cuts in the last fiscal year. “Private credit shrank in real terms.”
The IMF approved a three-year loan program that that seeks to slow inflation to as low as 6 percent and narrow the fiscal deficit to 3.5 percent of gross domestic product in the year ending June 2016, down from an estimated 8 percent in the fiscal year that ended June 30. An earlier $11.3 billion IMF loan expired in September 2011 after Pakistan failed to implement conditions attached to it.
The central bank will avoid focusing on inflation until 2014 to ease fiscal constraints as the government shores up its finances, according to an Aug. 19 note to the IMF posted on the finance ministry’s website. Sharif is aiming for 4.4 percent growth in the fiscal year that began July 1.
Foreign reserves fell by more than half to $4.8 billion in September from a year earlier, enough to cover about 1.5 months of imports, central bank data shows. Moody’s Investors Service said on Sept. 9 that the IMF’s assistance may boost foreign reserves to $7.3 billion through the 2014 fiscal year.
The Pakistani rupee has fallen more than 7 percent against the dollar this year and reached a record low on Sept. 2, compared with a 14 percent drop for the Indian rupee, according to data compiled by Bloomberg. The Karachi Stock Exchange 100 index has climbed about 38 percent in the period, among the world’s 10 best performers, on strong corporate earnings.
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