Pakistan Holds Key Interest Rate After IMF Warning on ReservesKhurrum Anis and Faseeh Mangi
Pakistan’s central bank left its benchmark interest rate unchanged after two straight increases, pausing even after the International Monetary Fund warned that reserves had fallen to a “critically low” level.
The State Bank of Pakistan kept the discount rate at 10 percent, Governor Yaseen Anwar told reporters in Karachi today. Fourteen of 16 analysts in a Bloomberg News survey predicted the decision, with two expecting an increase of 50 basis points.
The IMF faulted central bank authorities this month for failing to do enough to prevent reserves from dwindling. The central bank has raised the benchmark interest rate by 100 basis points since the IMF approved a $6.6 billion loan in September to bolster an economy suffering from power shortages and a Taliban insurgency.
“The decision may upset the IMF, which wants the central bank to play a role to control inflation and reduce the deficit,” said Yawar Uz Zaman, a senior analyst with Alternate Research in Karachi. “This may also impact the next quarterly tranche we receive from the IMF, meaning they could hold the installment and even impose further restrictions on us.”
While Pakistan’s performance in the first review was mostly satisfactory, the IMF called for more action to increase reserves. An earlier, partially disbursed $11.3 billion IMF program expired in September 2011 after Pakistan failed to meet the conditions attached to it.
“They have agreed with us to tighten interest rates as needed to address inflation and rebuild foreign exchange reserves,” Jeffrey Franks, the IMF’s Pakistan mission head, said in a phone interview on Jan. 7.
Prime Minister Nawaz Sharif has changed energy policies to tackle power shortages and plans to raise as much as $1 billion in a bond issue abroad to raise funds. Currency reserves held by the State Bank of Pakistan have fallen about 60 percent to $3.7 billion on Jan. 2 from a year earlier, central bank data show.
Pakistan’s inflation of 9.18 percent in December was lower than the median estimate of 10.2 percent, according to data compiled by Bloomberg.
“Inflation has come off last month, plus we are expecting inflation will decline further in January,” Syed Akbar Ali, research head at United Bank Ltd., said by phone from Karachi.
The economy may expand 3 percent to 4 percent in the year to June, the central bank said Jan. 15, topping an IMF estimate of 2.5 percent to 3 percent. Average inflation should remain between 10 percent and 11 percent in the fiscal year, compared with 7.4 percent in the previous year, the bank said.
Pakistan’s rupee has fallen 7.4 percent against the dollar over the past year, compared with an 11.5 percent drop for India’s rupee, according to data compiled by Bloomberg. Pakistan received its second tranche of $553.5 million on Dec. 24 from the IMF, and by Dec. 30 had repaid the lender $6.36 billion since July 2011. The next disbursement is due in March.
The central bank must “unhesitatingly” use every policy tool at its disposal to boost reserves, including adjusting the policy rate, intervening to purchase reserves on the spot market, and allowing greater flexibility of the exchange rate, the IMF said Jan. 3.