Source: Bloomberg

By Khalid Qayum and Khaleeq Ahmed

March 2 (Bloomberg) — Pakistan’s top economic policy maker said the International Monetary Fund, which gave the Asian nation a $7.6 billion bailout loan in November, had agreed there is scope to lower interest rates.

“We were able to convince the IMF that as inflation is coming down, we are looking at reducing interest rates in the next few weeks and months and they have agreed with us,” Shaukat Tarin, finance adviser to Pakistan’s prime minister, told a news conference in Islamabad today. Tarin met with IMF officials in Dubai last week.

Lower borrowing costs may help revive South Asia’s second- largest economy, which is challenged by renewed tension between the Pakistan Peoples Party-led coalition government and the biggest opposition party. In November, the central bank raised its benchmark interest rate by two percentage points to 15 percent, the highest in more than a decade, as part of conditions for the IMF loan.

“Room has been provided for some sort of easing in monetary policy, mainly because of the reduction in global commodity prices,” said Asif Ali Qureshi, head of research at Invisor Securities Ltd. in Karachi. “The central bank may cut its key interest rate by mid-year.”

State Bank of Pakistan in January kept its policy rate unchanged as inflation slowed to an eight-month low of 20.52 percent. The central bank’s next monetary policy statement is scheduled for April.

`First Target’

Pakistan has revised its economic growth target for the fiscal year ending June 30 to 2.5 percent, from a previous estimate of 3.4 percent, Tarin said. Inflation is predicted to average 20 percent, down from an earlier forecast of 23 percent.

“Our first target is to reduce inflation, which is our worst enemy,” Tarin told reporters. “It is hurting the economy and if we are able to reduce inflationary pressures, we can reduce interest rates.”

In the coming quarters, there will be good news on agriculture due to bountiful wheat and rice crops, he said. “The bad news is that because of high interest rates, exports and factories production will suffer.”

Pakistan may have room to lower interest rates if inflation keeps declining, the IMF said in a Feb. 25 statement, while praising the country’s economic management during the global financial crisis.

Political Instability

Pakistan has set an economic growth target of 4 percent next fiscal year, while average inflation will reduce to 6 percent, the finance adviser said.

“Within a period of 24 months, the government would have been able to stabilize the macro economy and we will be able to achieve annual economic growth of 6 to 8 percent,” Tarin said. “We will appeal to politicians that we have security issues, so please don’t give us political instability.”

Last week’s renewed tension between the Pakistan Peoples Party-led government and former Prime Minister Nawaz Sharif is threatening to derail the nation’s political stability. Sharif was barred by a court from running for elected office because of a previous conviction.

Separately, the government is facing pressure from Barack Obama’s administration to step up operations against terrorists that U.S. intelligence agencies say are sheltering in the country’s tribal region.

The IMF’s second instalment of $840 million will be released this month, Tarin said.

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four levels below investment grade. S&P in December raised Pakistan’s rating one level to CCC+, or seven levels below investment grade, after the IMF loan.

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Tags: central bank, economy, Government, IMF, Interest Rates, Loan, PPP