Pakistan slashes key interest
rates By Syed Fazl-e-Haider
KARACHI - Pakistan's central bank has
brought down its benchmark interest rate to a
single digit for the first time in five years in
announcing last week its monetary policy for
December and January.
The State Bank of
Pakistan (SBP) cut key interest rates by 50 basis
points to 9.5% in the wake of a persistent decline
in inflation. The country's consumer price index
(CPI) inflation eased to 6.93% year-on year in
November compared to 7.66% in October, according
to the Pakistan Bureau of Statistics (PBS). The
rate cut came after the International Monetary
Fund (IMF) on November 29 projected inflation to
return to double digits by next year.
Critics say the government has found a
reason for the interest rate cut by playing with
inflation figures. The rate cut will lead to further
government borrowing from the
banks, instead of benefiting the private sector,
particularly at a time when elections are nearing
and the government wants more money in hand to
take populist measures. The current National
Assembly has to be dissolved on or before March
Central bank governor Yaseen
Anwar pointed out that the decline in inflation
has been considerably faster than earlier
estimates. He said in the monetary policy
statement, "This broad-based deceleration in
inflation is now expected to keep the average
inflation for the fiscal 2013 below the 9.5%
target for the year."
The central bank is
carrying out monetary easing in a move to boost
economic growth, which the IMF projects at 3.2%
against the official target of 4.5%. The local
business community is happy with the reduction of
50 basis points in the key policy rate, but it
demands a further cut to promote economic
"The cut in monetary policy is
good but it is coming at a time when other
important factors for investment are not
attractive," The Express Tribune reported Khurram
Shehzad, head of research at Arif Habib Corp, as
saying. "With severe energy shortages and
persistent security issues in the country,
investors are clearly reluctant to invest right
now despite considerable cut in interest rates."
In a statement issued at the end of last
month after the IMF board concluded discussions
and evaluation of the 2008 stand-by arrangement
with Pakistan, the Washington-based lender urged
the country to have a more independent central
bank to fight inflation.
The IMF has
projected the country's budget deficit to reach
6.5% of gross domestic product (GDP) in the
current fiscal year (ending June 2013), against
the government's 4.7% target. The fund urged the
country to reduce its large budget deficit by
widening its tax base.
"underscored that reducing the large fiscal
deficit is essential for restoring macroeconomic
and external stability," Reuters reported the IMF
as saying in a summary of the board's discussion
The fiscal deficit of 284
billion rupees (US$2.9 billion), or 1.2% of GDP,
during the first quarter (July-September) of
2012-13 was entirely financed by borrowings from
domestic sources, according to the central bank.
Almost 91% of last year's fiscal deficit was also
financed from domestic sources.
government excessively relies on inflation-fueling
borrowing from the banking system without focusing
on measures to generate revenue from taxes and
privatization deals. The government's borrowing
from the banking system stood at more than 12.1
trillion rupees between July 1 and November 15,
double the level during the corresponding period
of last year.
The 6.93% inflation in
November is a level achieved for the first time in
five-and-a-half years. The fast falling inflation
has confounded local experts, who are raising
questions over the method of computing the
inflation figures, as there is a difference
between prices of commodities quoted in official
statistics and prices in the market. The claim the
government is manipulating the data to pave the
way for a further cut in interest rates to appease
industrialists ahead of general elections.
"Inflation results are totally against
economic principles, and I can bet that the way
things are manipulated inflation will come down to
4% by June next year," The Express Tribune
reported Ashfaque Hasan Khan, Dean Business
School, National University of Sciences and
Technology (NUST) as saying.
government reduced gas prices, which declined at
around 40% per month for the last three months
following a change in the base year. The average
inflation in the first four months (July-October)
of the current fiscal year remained at 8.76%,
according to the PBS.
The finance ministry
strongly denies any manipulation of inflation
numbers. Finance Minister Hafeez Shaikh, who
claims that inflation has come down from a high of
25% in the fiscal year 2008-09 to single-digit at
present, has even been criticized by his cabinet
colleagues for the rise in food prices.
People's purchasing power has weakened
considerably because of persistently high
inflation during the last four-and-a-half years of
the Pakistan People's Party (PPP)-led coalition
government. The country's poor are hardest hit by
soaring prices. Local experts estimate that
Consumer Price Index inflation has jumped by
approximately 52% during the period.
Pakistan's fragile fiscal position is
likely to force it to seek a fresh loan to retire
the old one from the IMF in the next six months.
The country has so far repaid $2.52 billion to the
IMF out of the $8 billion loan the country
acquired in 2008 after its reserves had shrunk
75%, creating a balance of payment crisis.
The government is carrying out the
modalities for a new IMF loan, which is expected
to be sought in the third meeting of the IMF and
Ministry of Finance in February next year. Any new
IMF program is expected to be harsher then the
2008 stand-by arrangement, which ended on
September 30 last year without being completed.
"I don't expect an early program," Dawn
reported Sakib Sherani, former principal economic
adviser as saying. "The lack of a quick resolution
on a new program with the IMF could influence when
elections are called in Pakistan."
(http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author
of many books, including The Economic
Development of Balochistan (2004). He can be
contacted at email@example.com.
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