Saturday August 15, 07:33 PM
Pakistan lowers interest rate as economy improves: official
KARACHI (AFP) - Pakistan's central bank Saturday lowered its discount interest rate by one percentage point after acknowledging that the country's economy was showing resilience.
Saleem Raza, the Governor of the State Bank (SBAZ.OB - news) of Pakistan, announced the rate cut after releasing improved economic indicators when presenting the bank's latest quarterly monetary report.
"After the 100 basis points' decrease, the interest rate on money lent by the central bank to commercial or depository banks now stands at 13 percent," Raza told the news conference in Pakistan's financial capital, Karachi.
In November, the bank had increased the discount interest rate by two percentage points to 15 percent in a bid to counter soaring inflation and stabilise a weakening currency.
In April, the bank decreased the discount rate by one percentage point in a sign that the economy was stabilising.
"We have, in a difficult year, seen steady improvement in key indicators following continued implementation of the macroeconomic stabilisation programme," Raza said.
"Inflation continues to fall and our foreign exchange reserves have increased," he said.
He added that, "these positives reflect contraction in aggregate demand, much-needed fiscal consolidation and an improved balance of payments position."
However, he said, these achievements had not been without cost.
"Exacerbated by electricity shortages and security issues, real GDP growth fell to two percent during the last fiscal year, down from 4.1 percent a year earlier," Raza said.
"Large-scale manufacturing activity has already seen a record run of 11 consecutive months of decline up to May 2009. Further, there has been no growth in credit to the private sector.
"Given the various structural constraints faced by the country in economic and security spheres, recovery could be slow and sporadic," he said.
He said inflation had decreased but warned that increasing oil prices on the international market and Pakistan's own power tariffs could exert inflationary pressures.
"The revival will be slow and sporadic. Power shortages and security issues have hurt growth and the likely increases in oil and power costs may renew inflationary pressure," he said.
In November, the International Monetary Fund (IMF) set an increase in the discount rate as a pre-condition for a 7.6-billion-dollar credit line for Pakistan, to stave off a looming balance-of-payments crisis.
The IMF agreed earlier this month to increase the loan to 11.3 billion dollars in response to gradual economic growth in Pakistan, which is currently engaged in a fight against Taliban insurgents.
"We have a total of 11.85 billion dollars in foreign exchange reserves, of which the State Bank holds 8.36 billion dollars. We expect the State Bank's reserves to increase further in coming months," Raza said.
Pakistan's current account deficit decreased from 7.5 percent to 5.3 percent during past 12 months, owing to reduced inflationary pressures, Raza said.
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