Tarin confident about interest rate cut

[LahoreEstate]

IMF condition for reducing discount rate if core inflation falls will be met

Tuesday, March 03, 2009
By Khalid Mustafa

ISLAMABAD: The International Monetary Fund has agreed to allow reduction in the State Bank of Pakistan’s discount rate that would lead to overall downward revision of interest rates by the banking and finance sector.

Top economic manager of the country on Monday said that the International Monetary Fund has agreed on discount rate cut in the next quarter’s monetary policy to be unveiled in April provided core inflation continues to decline.

“There still exists a four per cent gap between the discount rate, which stands at 15 percent, and core inflation which hovers at 19 per cent. However, if the decline in core inflation on monthly basis continues, then in April the government would reduce the discount rate accordingly,” said Adviser to Prime Minister on Finance Shaukat Tarin at a press briefing after holding talks with the IMF in Dubai.

“The Fund always pursues a policy to raise the discount rate under its programme, but Pakistan has managed to convince the IMF for a cut in the rate keeping in view the reduction in core inflation on monthly basis.”

In the month of June, he said, inflation would be brought to 10 per cent on month-on-month basis. The average inflation target has been revised to 20 per cent from 23 per cent, which the government would achieve by the end of current fiscal year in June.

Tarin said, “now we are looking at reducing interest rates which will help generate economic activities in the country.”

When asked about the impact of ongoing war against terrorism, he said that according to unconfirmed estimates annual cost of war hovers between $7 billion and $8 billion. “However, I have no confirmed estimates about the impact of the war on Pakistan’s economy.”

About the economic target revised in Dubai talks, the Adviser said that tax revenue target has been fixed at Rs1,300 billion, which was earlier set at Rs1,360 billion. However, he said that Rs1,300 billion target, “is still difficult to achieve keeping in view a massive slowdown in economic growth and little time to widen the tax base.”

In the last fiscal year, the tax to GDP target was 9.6 per cent which was fixed with the IMF at 10.2 per cent under $7.6 billion loan programme, but, “now both the IMF and Pakistan has revised the tax to GDP ratio to 10 per cent for the current fiscal. The tax to GDP ratio for the next fiscal has been agreed at 10.6 per cent.”

He said that GDP target, which was 5.6 per cent in the last fiscal, was fixed under the IMF programme at 3.4 per cent and now under the economic scenario of the world the growth target has been fixed at 2.5 per cent for the current fiscal.

To a question, he said that inflation target for next year has been agreed at single digit of 6 per cent. “This is to ensure the low inflationary environment which will be benefiting the country on long-term basis.”

The current account deficit target has now been revised to below 6 percent from 6.5 percent and for next fiscal, it has been agreed at 4 percent.

However, the country would attain the fiscal deficit target of 4.2 percent, as the government would collect ample non-tax revenue mainly through petroleum development levy on POL products. The fiscal deficit target for next year has been fixed at 3.3 percent.

To a question he said that heavy amount of $ 1.1 is due from USA against the expenditures which Pakistan has borne to carryout war against militants during May, 2008 to January 2009.

To a question, Tarin disclosed that Pakistan is all set to get second tranche of $ 840 million from International Monetary Fund (IMF) in current month under 23 month $ 7.6 billion bailout package that will furtherer strengthen the foreign reserves.

“We were expecting the $750 million, but now would receive $840 million because of the upward fluctuations in exchange rates against the special drawing rights (SDR).”

IMF under Standby Arrangements had accorded approval to US $ 7.6 billion for out of which Pakistan received first tranche of $3.1 billion in November, last year.

Pakistan would start negotiating and lobbying seeking enhancement of IMF funding quota from five times to eight in the IMF Executive board meeting to be held in April this year. In case the IMF increases Pakistan’s quota to 8 times then it would be having additional 4.5 billion dollars in foreign reserves under the Stand By Arrangement.

He argued that Ukraine and Iceland had been given the 8 times quota funding so Pakistan would follow the suit to this effect.

To a question about the impact on Pakistan’s economy in the wake ongoing political turmoil, Tarin said that economic and political stability goes hand in hand. However, the economic indicators are right on way to improvement. When asked if IMF has expressed its concern on political mess in Pakistan, he said that development in Punjab political scenario took place when all the issues were finalized with IMF. However, he said that IMF has no political agenda rather it has economic agenda.

The government is planning to allure investments of Pakistanis living abroad by giving them incentives in the country for their investments. About massive increase in sugar prices Tarin said since the sugarcane production has decreased.

Last year sugar growers could not get reasonable prices the bumper crop, which is why the price of the said commodity has increased to Rs 48 to Rs 50 per kg. He said that the government is going to import the sugar to meet the deficit. However, the government is to ensure the sale of sugar at utility stores at the cost of Rs 38 per kg.

http://www.thenews.com.pk/daily_detail.asp?id=165283