State Bank governor says economy growing, no need for aid

[Naveed Yaseen]

DUBAI (November 11 2009): Pakistan will not need additional financial aid, despite hefty costs of fighting insurgents, as the economy is out of the woods with growth seen around 3 percent this fiscal year, its central bank governor said. The International Monetary Fund bailed out Pakistan in 2008 to avert a balance of payment crisis as its economic performance was hit by imbalances and political and security uncertainties.

"I think we are (out of the woods)," State Bank of Pakistan Governor Salim Raza told Reuters in an interview on Tuesday in the United Arab Emirates. Pakistani growth slipped to 2 percent in the 2008/09 fiscal year, from 5.6 percent in the previous year, slowing down even before the global financial crisis unfolded late in 2008.

The growth rate should recover to around 3 percent this fiscal year to June 30 and keep accelerating in coming years as the government's fiscal position improves and efforts to clamp down on Taliban insurgents pay off, Raza said. "We hope we will be heading towards 4.5 percent (next fiscal year)," Raza said, adding he hoped the economy would grow by as much as 6 percent over the following three years.

However, he estimated the economic impact of fighting Islamist militants at 1 or 2 percent of the country's gross domestic product (GDP). The army is waging a massive offensive against Taliban militant strongholds in South Waziristan that has prompted a spate of bloody revenge attacks on urban targets.

NO NEED FOR RESCUE The IMF expects the GDP growth of Pakistan, a nuclear ally of the United States, to remain unchanged at 2 percent this fiscal year and to rise to 3 percent in the 2010/11 fiscal year. Pakistan was kept afloat by a $7.6 billion IMF emergency loan in November, 2008. The loan was increased to $11.3 billion in July.

"With the level of committed funds ... we will be able to meet our balance quite comfortably," Raza said. "I do not envisage the need for any more funds." Allies pledged another $5.7 billion in aid to Pakistan over the next two years in April, but only a fraction of that has trickled in, Raza said.

"It is slow. It is partly tied to projects and specific expenditures. We hope that in the course of this financial year the figure could reach somewhere between $1.5 and $2 billion." The IMF is reviewing the country's performance under the loan programme this month.

RATES APPROPRIATE Raza said he was against excessive monetary and fiscal stimulus to avoid a return of high inflation, which he expects to fall to single digits in October from 2008 peaks. "We need to be careful about moving too fast so that inflation is not let loose again," he said. "We hope inflation slipped to single digits (in October)."

Inflation peaked at a record high 25.3 percent in August 2008 due to soaring commodity and oil prices, before gradually easing to 10.1 percent in September. In September, the central bank kept its policy rate at 13 percent for October and November due to fears of fiscal slippages and concerns inflation may not have peaked.

Raza said lower inflation and low private sector credit growth both argued in favour of a looser monetary policy. "Given those developments we all look forward to some relaxation in our monetary policy stance," he said.

However, an increase in electricity tariffs, risks to oil prices and a great pressure on the government's fiscal position due to war costs urged for caution, he said. "I can't say right now what we will do at the end of the month. At present they (rates) are appropriate," Raza said. "So what the direction would be is a balance of positive developments and some of the uncertainties that are still in our picture," he said.

The central bank pursued tight monetary policy in 2008 by raising the key policy rate by 500 basis points to keep inflation in check. It cut the policy rate by 200 basis points in two same steps in April and August.

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