Pakistan May Keep Key Rate Unchanged After Two Cuts This Year
Sept. 29 (Bloomberg) -- Pakistan’s central bank will probably keep its benchmark interest rate unchanged, waiting to see if two cuts this year are enough to revive economic growth.
State Bank of Pakistan will maintain its discount rate at 13 percent, according to seven of 11 economists in a Bloomberg News survey. The other four expect a reduction. The central bank’s monetary policy statement is scheduled to be released after 4 p.m. today in Karachi.
The Asian Development Bank last week cut 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. Governor Salim Raza, who has this year slashed borrowing costs from a decade high, says recovery could be “slow and painful.”
“Challenges to the outlook remain,” said Anushka Shah, an economist at Citigroup Global Markets in Mumbai. “Electricity shortages, muted trends in credit growth, and a continued contraction in trade indicate that the economy is not out of the woods yet.”
Pakistan is relying on aid pledged by foreign donors to help boost growth in an economy pummeled by the global recession, a war against Taliban insurgents and what the ADB described 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. 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.
‘Still Unclear’
A meeting of international donors in New York last week was a “disappointment” and the status of pledges worth $5.3 billion made at a summit in Tokyo in April were “still unclear,” said Muzzammil Aslam, an economist at JS Global Capital Ltd. in Karachi.
“Only a fraction of the pledges have so far been realized despite continuous warnings by the IMF and the U.S. of Pakistan’s economic despair,” Aslam said.
South Asia’s second-largest economy was forced to turn 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.
Governor Raza, who took over at the central bank at the start of the year, has since April reduced the benchmark rate from 15 percent as the war against Taliban insurgents threatens what the IMF says is already an “anaemic” economy.
IMF Rescue
Policy makers last raised borrowing costs by 2 percentage points on Nov. 12, the fourth increase in 2008, as part of conditions for the IMF loan and to curb inflation that reached a 30-year high.
Inflation slowed to a 20-month low of 10.7 percent last month, the Federal Bureau of Statistics said Sept. 10. Weaker price gains may give the central bank scope to lower interest rates further, said economists including Muzammel Hussain.
“The reasonable slowdown in inflation from the last policy announcement and the inflation figures for August may convince central bank to cut,” said Hussain, head of research at Alfalah Securities Ltd. in Karachi. “They might still choose to keep rates unchanged, but the reasons for a cut are clearly there and would be positive for stimulating the economy.”
The Pakistan Peoples Party-led government is betting lower interest rates will revive the confidence of investors, who have shied away from the country because of militancy in the northwest and a crumbling economy. Private investment as a share of gross domestic product has fallen for three straight years, the ABD said in last week’s report.
“Interest rate policy will have to continue balancing the demand for price stability and the need to revive the economy,” the Manila-based lender said.
Pakistan’s $146 billion economy may expand as little as 0.8 percent in the fiscal year to June 2010, according to HSBC Holdings Plc, the weakest pace since 1952. The government estimates growth of 3.3 percent.
Contributor Key Rate AKD Securities Cut by 0.25 to 0.5 percentage points Alfalah Securities Cut by 0.5 percentage points Foundation Securities Cut by 0.5 percentage points Global Securities Cut by 0.5 percentage points Arif Habib Securities Unchanged BMA Funds Unchanged Elixir Securities Unchanged First Capital Equities Unchanged Invest Finance Securities Unchanged JS Global Capital Unchanged Standard Chartered Unchanged
To contact the reporter on this story: Farhan Sharif in Karachi at Fsharif2@bloomberg.net
To contact the editor responsible for this story: Michael Dwyer at mdwyer5@bloomberg.net