Pakistan inflation hits three-decade high

Islamabad: Pakistan's inflation accelerated to near a three-decade high in October, placing further strains on a nation that the International Monetary Fund (IMF) says needs $10 billion (Dh36.78 billion) to avoid defaulting on its debt.

Consumer prices in South Asia's second-largest economy soared 25 per cent from a year earlier after gaining 23.9 per cent in September, the Federal Bureau of Statistics said in Islamabad yesterday. Transport and communication costs jumped 39.3 per cent, with food and beverages prices up 31.7 per cent.

Pakistan may be compelled to raise interest rates in order to receive an IMF bailout, if the Washington-based lender insists on the same conditions it applied to loans for Iceland and the Ukraine. Higher borrowing costs may not bring inflation down soon as other conditions attached to an IMF loan would likely include higher energy prices, economists said.

"The time when inflation actually starts to recede may be pushed forward further," said Khaled Iqbal Seddiqi, head of research at InvestCapital Securities in Karachi.

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"Even though fuel prices are currently on the way down, there are other utilities whose prices are likely to be raised by the government, as per an agreement with the IMF."

State Bank of Pakistan Governor Shamshad Akhtar is struggling to bring inflation under control amid a blowout in the nation's balance of payments and a 31 per cent drop in the rupee this year, which has driven up import costs. The currency reached a record low of 83.55 per dollar on October 17.

The nation's foreign reserves have also shrunk to $3.71 billion on October 25 from $14.2 billion a year ago, raising concern that Pakistan will not be able to pay its $3 billion debt servicing costs due in the coming year.

Gasoline prices in Pakistan were cut by 6 per cent on November 1, the seventh change in eight months, after a decline in crude oil prices in the international market.

Pakistan is expected to make a formal request for financial assistance to the IMF this week, the Business Recorder reported yesterday, without elaborating on where it obtained the information.

Conditions attached to an IMF loan would include an increase in the central bank's benchmark interest rate to 15 per cent from 13 per cent, as well as a 31 per cent rise in tariffs on electricity and other utilities, the newspaper reported.

Pakistan is also seeking funds from lenders such as the World Bank and the Asian Development Bank and donor countries included in the 'Friends of Pakistan' group to help stabilise its economy. A meeting of the group, which includes the US, UK, China and Saudi Arabia, is scheduled for this month in the UAE.

Pakistan's credit rating was lowered by Standard & Poor's and Moody's Investors Service in October on concern the nation won't be able to pay its overseas debt because of eroding foreign reserves.