KARACHI: 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 stabilise 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.
The IMF called for a tighter monetary policy to contain inflation and rebuild reserves in approving a $6.6bn loan to help the 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 $231bn economy. “Inflation has shot up,” Tariq Hussain Khan, research head at Pearl Securities, said before the decision.
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 on Thursday, referring to rate cuts in the last fiscal year.
The IMF approved a three-year loan programme 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 $11.3bn 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 August 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.
WP-Bloomberg
