Pakistan Says Aid Delays May Limit Pace of Rate Cuts

By Naween A. Mangi

Oct. 15 (Bloomberg) -- Pakistan’s central bank Governor Salim Raza said delays in foreign aid inflows may restrict the pace of interest-rate cuts if the government borrows more from banks to meet its fiscal deficit target.

“We’re going to see a progressive decline in inflation,” Raza said in an interview in Karachi today. “The trend should be decreasing inflation, progressive easing. But in order to have more expansive policy, you really need the fiscal side under control. It probably isn’t the time to take the foot off the monetary brake.”

Pakistan is relying on aid pledged by foreign donors to help boost growth in an economy pummeled by the global recession, a war against Taliban insurgents and a chronic shortage of power. The central bank kept its benchmark interest rate unchanged on Sept. 29, waiting to see if two cuts earlier this year are enough to revive economic growth.

“In November, the central bank may want to give a little bit of an indicator, maybe with a 50 basis point cut, that they’re willing to start reducing,” said Nasim Beg, who overseas 16 billion rupees ($192 million) in stocks and bonds at Arif Habib Investments Ltd. in Karachi. “But government borrowing remains high and I don’t think they would want to do anything substantial.”

Pakistan’s rupee and 10-year government bonds were little changed. The local currency was at 83.25 per dollar as of 3 p.m. in Karachi, according to data compiled by Bloomberg. The yield on the 12 percent note due August 2018 was 12.72 percent.

Next Policy

Pakistan’s next monetary policy announcement is scheduled for the end of November. Raza has reduced the benchmark rate to 13 percent since April.

Policy makers last raised borrowing costs by 2 percentage points to 15 percent on Nov. 12, the fourth increase in 2008, to curb inflation that reached a 30-year high.

Gains in consumer prices slowed to a 21-month low of 10.12 percent in September. Pakistan’s fiscal deficit target for the year ending June 30 is 4.9 percent of gross domestic product.

The government plans to raise about $500 million early next year through a Eurobond sale, said Raza, 63, who took over as governor in January.

“It’s important to be in the market, even if you don’t need it for your reserves,” he said. “It improves the size of the market you can tap and gives you the capacity to raise money at short notice.”

Pakistan’s foreign exchange reserves held by the central bank were $11.2 billion as on Oct. 3, according to official data.

‘Tough Job’

“It will be a tough job to attract investors given Pakistan’s ratings and the international situation,” said Sarah Mazher, a research analyst at Global Securities Ltd. in Karachi. “They will need to do it, because we don’t even have a timeframe for the external inflows, but I don’t think its feasible when external debt is already at $52 billion.”

Pakistan’s long-term sovereign debt rating was raised to B- from CCC+ in August by Standard & Poor’s, six levels below investment grade.

Moody’s Investor Services, which raised Pakistan’s credit rating outlook to stable from negative in August, rates the Asian country’s foreign debt at B3, the same ranking as Argentina and Bolivia.

“Raising $500 million is not too much of an uphill task,” Arif Habib’s Beg said of Pakistan’s plan to raise money through a Eurobond sale. “The government is very dependent on foreign aid. Creating an alternative source of funding will give confidence to everyone.”

Aid Pledges

Pakistan is yet to receive aid pledges made in April by the U.S.-led 25-member Friends of Democratic Pakistan group. Of the $5.3 billion in pledges, Pakistan is expected to receive about $1.7 billion before June, Raza said.

Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to the government. More than 3,500 terrorist incidents have taken place in Pakistan since 2007.

The International Monetary Fund on Aug. 8 agreed to increase a loan to Pakistan by $3.2 billion, after the country was forced to turn to the Washington-based lender for a $7.6 billion bailout in November. President Barack Obama is scheduled to sign a bill this week which would triple annual economic and social-development assistance to Pakistan to $1.5 billion for the next five years.

The Asian Development Bank last month cut its forecast for Pakistan’s economic expansion in the year to June 2010 by a percentage point to 3 percent. It said any faster growth would require an improvement in the security environment.

To contact the reporter on this story: Naween A. Mangi in Karachi, Pakistan on Nmangi1@bloomberg.net.