By Khalid Qayum and Farhan Sharif
Nov. 12 (Bloomberg) -- Pakistan's central bank increased its benchmark interest rate by 2 percentage points, 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 today 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 $3.5 billion as of Nov. 1 from $14.2 billion a year ago, raising concern the country will not be able to pay the $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 conditionality 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. The central bank is aiming to keep average inflation at 12 percent in the fiscal year that started July 1, the same as the previous 12-month period.
IMF Bailout
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 U.S., Europe and elsewhere in Asia, which have been lowering borrowing costs to stave off a global recession.
The U.S. Federal Reserve has reduced its target for the overnight lending rate between banks by 4.25 percentage points since September 2007 to 1 percent. The Reserve Bank of India has cut its benchmark rate twice in less than a month and the Bank of Japan on Oct. 31 lowered its key rate for the first time in seven years.
Pakistan needs $10 billion over the next two years to avoid defaulting on its debt, according to IMF estimates. Pakistan ended its last IMF program in 2004.
`Steeper' Tightening
``State Bank remains committed to price stability so we have to introduce steeper monetary tightening to tame demand pressures,'' Akhtar said today. ``We need to avert the depletion of our foreign reserves.''
Standard & Poor's and Moody's Investors Service lowered their credit ratings for Pakistan in October, citing the nation's inability to pay its overseas debt due to eroding foreign reserves.
Pakistan and IMF officials held week-long talks in Dubai in October to discuss a rescue package. Governor Akhtar, who led the discussions, said at the end of the talks that there was ``no possibility'' of the nation defaulting on its debt.
South Asia's second-biggest economy is also seeking funds from lenders such as the World Bank and the Asian Development Bank and donor countries such as the U.S., China and Saudi Arabia which are part of the `Friends of Pakistan' group. The group was established earlier this year to help Pakistan stabilize its economy.
Economic Turmoil
Pakistan is facing economic turmoil after the rupee in October plunged to an all-time low and the balance of payments widened to a record. The crisis mounted after the Pakistan Peoples Party-led government, which came to power in March, was paralyzed for almost six months because of political wrangling.
Pakistan's economy has ``deteriorated significantly'' and growth may slow to a six-year low, the IMF said in an Oct. 20 report. Growth is expected to weaken to 3.5 percent in the year to June 30 from 5.8 percent last year, the IMF said. The government predicts the economy will grow 5.5 percent this year.
``I don't think there was a need for this increase'' in interest rates, said Iqbal from the Pakistan Muslim League Nawaz party, which pulled out of the nation's ruling coalition in August though it still supports the government to stay in power. ``It will slow economy and take it into recession.''
For Related News: Bloomberg stories on Pakistan's economy: TNI PAK ECO BN
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