IMF for keeping discount rate on hold

[LahoreEstate]

KARACHI: The International Monetary Fund (IMF) has advised Pakistan to keep the interest rate at the present level unless inflation falls decisively.

The transcript of a conference call on completion of the first review of Pakistan’s stand-by arrangement was issued by the IMF on Tuesday.

‘It would be particularly important to keep the policy interest rate on hold until inflation falls decisively,’ said Adnan Mazarei, IMF Mission Chief for Pakistan.

The policy discount rate was increased in November 2008 by two to 15 per cent after agreement with the IMF for $7.6 bill loan.

Pakistan entered a 23-month standby credit facility to correct external and fiscal imbalances with promise to bring down inflation.

The next 1.5 per cent discount rate increase was expected in January, but the government avoided an increase due to sharp fall in economic growth while the business sector showed reluctance to borrow costlier money.

IMF’s condition to bring down core inflation from 18.8 per cent was not met in January. Instead it was slightly up at 18.9 per cent. The business community raised voices against high interest rate which made their manufacturing and trading much costlier than the entire region as well as international market.

Hopes were high that interest rate which has become a prime concern for business community, would be reduced in the next review of the monetary policy.

The monetary policy review is expected by mid of this month.

However, the current IMF advice practically faded away the hope for decline in policy discount rate.

The advice came after IMF approved second tranche of $847 million for Pakistan.
The grave impact of high interest resulted in a sharp fall in credit off-take by the private sector. In the first eight months of the current fiscal year credit off-take remained just one third of what it was during the eight months of the previous year. Pakistani banks are flooded with ample liquidity which is absolutely reverse of the developed and developing economies where liquidity crunch jammed the economic wheels.

The credit supply cut demonstrated damaging impact on the economic growth and vastly slashed jobs in the country.

However, economic managers failed to bring inflation under control. The main inflation CPI (Consumer Price Index) was over 21 per cent in February.

The advisor to Prime Minister on Finance recently said the inflation could come down to single digit in June but gave no explanation as to how inflation would fall that sharply.

Apparently there is no strategy on display to bring down the inflation despite successful decline in the monetary expansion during the first eight months of the current fiscal.

Both, manufacturers and exporters are facing tough time with the costlier money. Exporters are unable to make their products cost-effective for the international market while the manufacturers of local products said they are under thereat of increasing cheap smuggled goods from China and India.

The banks which witnessed 21 per cent decline in their profits in 2008 have been placing their liquidity with the government securities.

‘The authorities need to maintain their generally prudent policies. They also need to move forward with regard to tax reforms and strengthening of the social safety net,’ said Mazarei.

He said as regards the outlook, earlier on, IMF had projected that in fiscal year 2008-2009, which begins in June, growth would be 3.5 per cent.

‘More recently, we have revised the 2008-2009 growth projection to 2.5 per cent,’ he said.

For 2009-2010, we had originally followed last year and envisaged a growth of five per cent, and we have lowered this to four per cent, but risks are considerable, he said.

‘And it is likely that the growth projection, using actual outcome for 2009-2010, may be lower,’ said Mazarei.


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