Pakistan May Lower Interest Rates to Spur Economy
Pakistan’s central bank will probably cut its benchmark interest rate for a third time this year to aid an economy dragged down by war.
State Bank of Pakistan will lower its discount rate to 12.5 percent from 13 percent, according to seven of 12 economists in a Bloomberg News survey. Four expect a percentage point reduction, while one predicts no change. The central bank’s monetary policy statement is due at 5 p.m. today in Karachi.
Pakistan’s campaign against Taliban militants is costing the government more than $8.5 billion a year and has prompted a spate of terror attacks in the Punjab region, which generates more than half of the country’s economic growth. Governor Salim Raza last month said it probably wasn’t the right time for the central bank to “take the foot off the monetary brake.”
“Sustained improvement in the economy depends on the political situation turning around and on a major easing of security concerns,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “Pakistan’s problems are too intractable to expect a major improvement in these areas any time soon.”
Pakistan is relying on aid pledged by foreign donors to help boost growth in an economy pummeled by the global recession, the war against Taliban insurgents and what the Asian Development Bank describes as a “lingering power crisis.”
The International Monetary Fund on Aug. 8 agreed to increase a loan to Pakistan by $3.2 billion, after the country was forced to turn to the Washington-based lender for a $7.6 billion bailout in November 2008. The U.S. Senate on Sept. 24 voted to triple annual economic and social-development assistance to Pakistan to $1.5 billion for the next five years.
IMF Rescue
Pakistan turned to the IMF for a rescue package to avoid defaulting on its debt, after the country’s foreign-exchange reserves shrunk 75 percent in a year to $3.5 billion and the current-account deficit widened to a record.
The government’s 12 percent local-currency bond maturing in August 2018 yielded 12.43 percent today, versus a record high of 16.68 percent on Dec. 16, 2008, according to data compiled by Bloomberg. The rupee was little changed at 83.55 per dollar in Karachi.
The nation’s long-term sovereign debt rating was raised to B- from CCC+ in August by Standard & Poor’s Corp. Moody’s Investors Service, which lifted Pakistan’s credit-rating outlook to stable from negative the same month, rates the foreign debt at B3. Both ratings are six levels below investment grade.
South Asia’s second-largest economy has “stabilized” as a result of inflows from the IMF program, though the outlook remains “especially uncertain,” according to Grice from Capital Economics. “The best that can be hoped for is a weak recovery,” he said.
‘Adequate Room’
Gross domestic product may expand 3 percent in the year through June 2010, “not much better” than the 2 percent growth of the previous 12 months, Grice said.
Pakistan’s central bank has been able to reduce interest rates due to slowing inflation.
Consumer prices rose 8.87 percent in October from a year earlier, according to the statistics bureau. That was the smallest increase in 22 months.
“Considering the latest inflation numbers, there is adequate room to cut rates,” said Asad Farid, economist at AKD Securities Ltd. in Karachi. “We expect the discount rate to bottom out at around 11.5 percent by March.”
Governor Raza, who has been running the central bank since January, on Sept. 29 kept borrowing costs unchanged, after slashing interest rates from a record high of 15 percent earlier in the year.
‘Gradual Recovery’
The ADB in August reduced its forecast for Pakistan’s economic expansion in the year to June 2010 to 3 percent and said a revival of growth would require an improvement in the nation’s security environment. The central bank in its Oct. 29 annual report said the economy is showing a “gradual recovery” and is likely to meet the growth target of 3.3 percent.
A cut in interest rates today may be the central bank’s last move for some time, according to analysts.