Business | Banking
Pakistan increases benchmark rate
Pakistan's central bank increased its benchmark interest rate by 2 percentage points, the most in more than a decade, as the government seeks a loan from the International Monetary Fund (IMF) to avoid defaulting on its debt.
- Bloomberg
- Published: 23:42 November 12, 2008
Islamabad: Pakistan's central bank increased its benchmark interest rate by 2 percentage points, the most in more than a decade, as the government seeks a loan from the International Monetary Fund (IMF) to avoid defaulting on its debt.
The State Bank of Pakistan raised the discount rate at which it lends to commercial banks to 15 per cent, Governor Shamshad Akhtar said on Tuesday in Karachi.
The increase was part of conditions for an IMF loan, said Ahsan Iqbal, a spokes-man for the Pakistan Muslim League-Nawaz party and former deputy chairman of the Finance Ministry's planning commission.
"It was the toughest decision of my life," Akhtar told reporters. "The IMF programme will be good for Pakistan as we need to be disciplined."
Debt-servicing worries
Pakistan has been forced to seek funds from the IMF after its foreign reserves shrunk to $3.5 billion as of November 1 from $14.2 billion a year ago, raising concern the country will not be able to pay the $3 billion in debt-servicing costs due in the next 12 months. Higher borrowing costs may also tame inflation, which accelerated to near a three-decade high in October.
"It seems to be part of IMF conditionality though the central bank will argue that higher inflation and a rising trade gap were the reasons for the increase," said Farhan Rizvi, an economist at JS Global Capital Ltd in Karachi.
Pakistan's rupee rose 0.03 per cent to 80.525 per dollar after the announcement.
Consumer prices in Pakistan jumped 25 per cent in October from a year earlier, after gaining 23.9 per cent in September. The central bank is aiming to keep average inflation at 12 per cent in the fiscal year that started July 1, the same as the previous 12-month period.
Pakistan joins Iceland and the Ukraine in raising interest rates in order to receive an IMF bailout. That's in contrast with the actions of central banks in the US, Europe and elsewhere in Asia, which have been lowering borrowing costs to stave off a global recession.
The US Federal Reserve has reduced its target for the overnight lending rate between banks by 4.25 percentage points since Sep-tember 2007 to 1 per cent. The Reserve Bank of India has cut its benchmark rate twice in less than a month and the Bank of Japan on October 31 lowered its key rate for the first time in seven years.
Pakistan needs $10 billion over the next two years to avoid defaulting on its debt, according to IMF estimates. Pakistan ended its last IMF programme in 2004.
Demand pressures
"State Bank remains committed to price stability so we have to introduce steeper monetary tightening to tame demand pressures," Akhtar said on Tuesday. "We need to avert the depletion of our foreign reserves."
Standard and Poor's and Moody's Investors Service lowered their credit ratings for Pakistan in October, citing the nation's inability to pay its overseas debt due to eroding foreign reserves.
Pakistan and IMF officials held week-long talks in Dubai in October to discuss a rescue package. Akhtar, who led the discussions, said at the end of the talks that there was "no possibility" of the nation defaulting on its debt.
South Asia's second-biggest economy is also seeking funds from lenders such as the World Bank and the Asian Development Bank and donor countries such as the US, China and Saudi Arabia which are part of the "Friends of Pakistan" group.
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