Pakistan Promises IMF to Raise Rates If Foreign Reserves Tumble

By Michael Dwyer

Dec. 3 (Bloomberg) -- Pakistan's central bank has promised the International Monetary Fund it will increase interest rates further if the nation's foreign reserves drop too low.

The State Bank of Pakistan said its benchmark discount rate “will be raised earlier” than the monetary policy statement due at the end of January 2009 if reserves fall below an agreed monthly floor, according to the arrangement between the IMF and Pakistan for a $7.6 billion bailout package. The Washington-based lender posted the agreement on its Web site.

“The program envisages a significant tightening of monetary policy,” the IMF said. “Interest rate policy will be sufficiently flexible to protect the reserves position and bring down inflation.”

The central bank's net foreign-asset floor for the end of December has been set at $1.165 billion, according to the IMF document. Pakistan's foreign reserves have shrunk 75 percent in the past year to $3.45 billion.

Governor Shamshad Akhtar on Nov. 12 raised the central bank's key rate by 2 percentage points to 15 percent, describing the move as “the toughest decision of my life.” Inflation accelerated to near a 30-year high in October, with consumer prices soaring 25 percent from a year earlier.

To contact the reporter on this story: Michael Dwyer in Singapore at Mdwyer5@bloomberg.net.