Pakistan raises interest rates to meet IMF terms

By Khalid Qayum  |   2008-11-13  |     NEWSPAPER EDITION

PAKISTAN'S central bank increased its benchmark interest rate by 2 percentage points yesterday, the most in more than a decade, as the government seeks a loan from the International Monetary Fund to avoid defaulting on its debt.

The State Bank of Pakistan raised the discount rate at which it lends to commercial banks to 15 percent, Governor Shamshad Akhtar said in Karachi.

The increase was part of conditions for an IMF loan, said Ahsan Iqbal, a spokesman for the Pakistan Muslim League-Nawaz party and former deputy chairman of the Finance Ministry's planning commission.

"It was the toughest decision of my life," Akhtar told reporters. "The IMF program will be good for Pakistan as we need to be disciplined."

Pakistan has been forced to seek funds from the IMF after its foreign reserves shrunk to US$3.5 billion as of November 1 from US$14.2 billion a year ago, raising concern the country will not be able to pay the US$3 billion in debt-servicing costs due in the next 12 months.

Higher borrowing costs may also tame inflation, which accelerated to near a three-decade high in October.

"It seems to be part of IMF conditions though the central bank will argue that higher inflation and a rising trade gap were the reasons for the increase," said Farhan Rizvi, an economist at JS Global Capital Ltd in Karachi.

Pakistan's rupee rose 0.03 percent to 80.525 per dollar.

Consumer prices in Pakistan jumped 25 percent in October from a year earlier, after gaining 23.9 percent in September.

Pakistan joins Iceland and the Ukraine in raising interest rates in order to receive an IMF bailout.

That's in contrast with the actions of central banks in the US, Europe and elsewhere in Asia, which have been lowering borrowing costs to stave off a global recession.

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