Pakistan cuts prime rates for second time

Pakistan cut interest rates for the second time this year as a war against Taliban insurgents threatens an already “anaemic” economy.

State Bank of Pakistan lowered its benchmark discount rate to 13 percent from 14 percent, Central Bank Governor Salim Raza said at a news conference in Karachi yesterday. All 12 economists surveyed by Bloomberg News expected the central bank to reduce borrowing costs.

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 region and a near-stagnant economy. The International Monetary Fund this month agreed to increase a loan to Pakistan to $11.3 billion from the $7.6 billion approved in November to bolster the nation’s “anaemic” growth.

“The challenge for policy makers is growth,” said Sayem Ali, an economist at Standard Chartered Plc in Karachi. “The inflationary cycle appears to be coming to an end.”

Raza has this year lowered borrowing costs by two percentage points from a decade high, taking advantage of the slowest inflation in 19 months.

“The revival will be slow and sporadic,” Raza said yesterday. “Power shortages and security issues have hurt growth. The likely increase in oil and power costs may renew inflationary pressure.”

Six Times

The central bank will announce monetary policy six times a year every alternate month instead of every quarter, Raza said. The next announcement will be in the last week of September.

The monetary policy committee will be expanded to include independent experts, in line with “best international practices,” he said.

The governor unexpectedly postponed State Bank of Pakistan’s monetary policy statement to yesterday from its initially scheduled release on July 25.

The delay may have been due to “fiscal slippages” resulting from declining tax revenue and “substantial” military expenditure that forced the government to borrow from the central bank for deficit financing, according to Ali from Standard Chartered.

The central bank also introduced a “corridor” for the overnight repurchase rate, Raza said. The discount rate will be a ’’ceiling’’ and the rate on the new overnight deposit facility, 300 basis points below the discount rate, will provide a “floor,” he said.

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.

Consumer Prices

Consumer prices rose 11.17 percent in July from a year earlier, the slowest pace since December 2007. Large-scale manufacturing output fell 8.5 percent in the 11 months ended May 30, according to the statistics agency.

“It is very critical that finance costs be lowered now,” said Asad Farid, an economist at AKD Securities Ltd. in Karachi. “If they aren’t, industry, which is already facing huge problems, will not be competitive.”

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 shrank 75 percent in a year to $3.5 billion and the current-account deficit widened to a record.

The loan outstanding from the IMF is equivalent to about 6.3 percent of Pakistan’s gross domestic product, according to estimates from the Washington-based lender. The entire standby arrangement was also extended by about two months until the end of 2010.

Economic Growth

The $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.

“Monetary policy needs to strike the right balance between supporting growth and keeping inflation in check,” said Ali from Standard Chartered.

Source: Bloomberg