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Pakistan may slash rates by a third
Pakistan may cut interest rates by as much as a third as the government's fight against the Taliban weakens an already deteriorating economy, analysts said.
- Bloomberg
- Published: 23:05 June 17, 2009
Singapore: Pakistan may cut interest rates by as much as a third as the government's fight against the Taliban weakens an already deteriorating economy, analysts said.
The State Bank of Pakistan may lower its policy discount rate by between 400 and 450 basis points from 14 per cent by the end of the year to help counter "entrenched recessionary inclinations," said Asad Fareed, an economist at AKD Securities in Karachi. The central bank's next monetary policy statement is due in late July.
Pakistan's army is extending its seven-week campaign against militants in the country's northwest and is now targeting Taliban commander Baitullah Mehsud in his South Waziristan stronghold.
The military campaign is straining the nation's budget deficit and may force the government to seek further bailouts from foreign donors.
"Government resources are constrained by the ongoing military operations in the North West Frontier Province," Sayem Ali, an economist at Standard Chartered in Karachi, said in a report.
"The government has had to allocate additional resources to military operations by reducing investment spending, at a high cost to the economy."
Pakistan's budget deficit is estimated to widen to 4.9 per cent of gross domestic product in the year starting July 1, Junior Economics Minister Hina Rabbani Khar told the parliament in Islamabad.
That's higher than last year's 4.3 per cent and more than the 4.6 per cent target set by the International Monetary Fund as part of a $7.6 billion (Dh27 billion) bailout agreed in November 2008.
The fiscal shortfall could end up being as much as 6.4 per cent of GDP unless the government makes "realistic cuts in development expenditures," AKD's Farid said in a report released after the weekend budget.
Prime Minister Yousuf Raza Gilani's government is counting on foreign aid to fund almost a third of next year's budget gap. Pakistan has asked the IMF for a $4 billion stand-by loan as "insurance" if the pledged assistance doesn't arrive, Shaukat Tarin, fin-ance adviser to the prime minister, said.
International donors including the US and Japan pledged $5 billion at a meeting in Tokyo in April to shore up the country's ailing finances and fight terrorism.
Governor Syed Salim Raza, who took over as head of the central bank at the start of the year, in April cut the benchmark interest rate for the first time since 2002, reducing borrowing costs from 15 per cent to help bolster economic growth.
Former Governor Shamshad Akhtar had raised the central bank's policy rate by the most in more than a decade in November, a move she described as "the toughest decision of my life," in order to secure a rescue package from the IMF.
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