Business News
Pakistan's central bank warns government to stop borrowing (Roundup)
By DPA
May 22, 2008, 14:05 GMT

Karachi - In a surprising hard-hitting move Pakistan's central bank on Thursday warned the government to stop unbridled borrowing and help the bank to control inflation.

'The inflation has reached to an unsustainable level, no country depends so much on its own central bank to meet fiscal deficit,' Shamshad Akhtar, governor central State Bank of Pakistan (SBP), said at a press conference in the port city of Karachi.

'Most countries disallowed borrowing to meet fiscal deficits from its central bank,' Akhtar said.

In order to fight inflation and carry out fiscal monetary control, Akhtar also announced hiking up the country's benchmark interest rates, popularly known as 3-day repo (discount) rates, by 150 basis points to 12 per cent.

'We want to increase cost of borrowing and want government to help us in fighting the inflation'.

The central bank governor also accused the government of violating the country's fiscal laws and did borrowing far more than the target, increasing pressures on State Bank to print more money and igniting inflation.

According to Akhtar, the government's borrowing doubled during the last 10 months of fiscal year 2007-2008 (July-June) to 944 billion Pakistani rupees (around 15 billion US dollars) from 452 billion rupees (7.5 billion dollars).

'This is dangerously at 9.44 per cent of GDP (gross domestic product). This reckless borrowing stocked inflation and the ultimate price is paid by businesses, industry and ordinary citizens,' Akhtar said.

'Our food inflation has almost doubled to 25.5 per cent from 12.2 per cent,' she added.

Pakistan's overall official inflation stands at a 30-year high and many economists believe it has reached a point where the road to hyper-inflation wouldn't be far.

Soaring inflation also had its beating on the Pakistani rupee recently which has been depreciated by over 14 per cent since the beginning of the outgoing fiscal year.

'We have seen around 11 per cent devaluation of the rupee in just 6 weeks from March,' Akthar said, accusing ballooning current account deficit, rising inflation and rampant government borrowing as major causes.

Pakistan's current account deficit soared to about 7.3 per cent of GDP during 10 months of the current fiscal year mainly due to slow growth in exports, increase in imports and sluggish foreign money inflows.

The deficit for July-April period has widened by 74.8 percent to an all time high level of 11.58 billion dollars.

The governor also cited rising cost of imports as also a big reason in mounting inflationary pressures and economic imbalances.

Pakistan's exports stood at 16.167 billion dollars as compared to imports worth 28.907 billion dollars during July-April.

It resulted in, governor said, a major erosion of a whopping over 4 billion dollars in the central bank's reserves during the last five months from a peak of 16 billion dollars to around 12 billion at present.

Meanwhile, the key KSE-100 Index of Karachi Stock Exchange fell 347.49 points or around 2.5 per cent to close at 13,627 against Wednesday's 13,974.49 points over the news of benchmark rate hike by the central bank.

'Institutional investors will now avoid investing in stocks and will more invest in the secured central bank instruments,' said Asif Qureshi, head of research at Invior Securities.

Earlier, two major international rating agencies had substantially cut Pakistan's sovereign dent ratings within a span of one week.

On Wednesday, Moody Investor Services cut Pakistan sovereign foreign currency bond rating to B2 from B1 to further put pressure on the market to bring it even lower than Turkmenistan and Jamaica.

Moody also reduced Pakistan's local currency debt issue rating to B2 bringing it to a par with Cambodia and Honduras.

On May 15, Standard & Poor's also reduced Pakistan's long-term foreign currency debt rating to B from B+, also citing expanding fiscal and external imbalances within the background of a volatile political setting.