Pakistan raises interest rates as it reaches out to IMF

Joins Iceland and Ukraine, in contrast with others that have lowered rates to stave off global recession

Pakistan’s central bank increased its benchmark interest rate by 2 percentage points on Wednesday, 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%, governor Shamshad Akhtar said in Karachi. The increase was part of conditions for an IMF loan, said Ahsan Iqbal, a spokesman 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 said. “The IMF programme will be good for Pakistan as we need to be disciplined.”

Pakistan has been forced to seek funds from IMF after its foreign reserves shrank to $3.5 billion (Rs17,080 crore) as of 1 November from $14.2 billion a year ago, raising concerns 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% to 80.525 per dollar. Consumer prices in Pakistan jumped 25% in October from a year earlier. The central bank is aiming to keep average inflation at 12% in the fiscal year that started 1 July.

Pakistan joins Iceland and 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 September 2007 to 1%. The Reserve Bank of India has cut its benchmark rate twice in less than a month and Bank of Japan on 31 October 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. “State Bank remains committed to price stability, so we have to introduce steeper monetary tightening to tame demand pressures,” Akhtar said. “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.

Source: Livemint