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Navigation Primary Navigation Home Singapore Asia Pacific World Business Entertainment Sports Technology Secondary Navigation Singapore Asia Pacific World Search Search: Higher rates seen as bitter IMF pill for Pakistan Reuters - Thursday, October 30 By Sahar Ahmed KARACHI, Oct 29 - With Pakistani and International Monetary Fund officials remaining tight-lipped about talks that are expected to lead to IMF help, analysts said on Wednesday that interest rates are likely the biggest bone of contention. The 7-month-old government running Pakistan after more than eight years under former army chief Pervez Musharraf has been loath to go to the IMF but the severity of its balance-of-payments crisis has left little option. An IMF package is usually contractionary and often involves cutting spending, raising taxes, accelerating privatisation, increasing interest rates, and exchange rate flexibility to correct fiscal and external imbalances and control inflation. Analysts said the most bitter pill for Pakistan to swallow might be having to tighten monetary policy. "At this stage, given the fact that monetary conditions are already tight and there are some banks that are feeling more of a squeeze than others, this sort of standard tightening of interest rates could be a little problematic for the authorities to implement," said Mushtaq Khan, a London-based economist for CitiBank. Khan said the government had already taken the difficult measures of eliminating subsidies and allowing the exchange rate to depreciate under payment pressures. As subsidies have been cut, Pakistan has raised retail fuel prices seven times since February and electricity rates have almost doubled. Inflation is close to 25 percent. The rupee has fallen nearly 25 percent against the dollar this year, while total foreign reserves have fallen sharply from a high of $16.5 billion in October last year to $7.32 billion on Oct. 18, of which the central bank accounted for $4.04 billion. The central bank's reserves represent about one-and-a-half months of import cover. "BUSINESSES COULD BUCKLE" The central bank raised the key discount rate in July by 100 basis points to 13 percent, putting a squeeze on hard-pressed businesses which would hate another rise imposed by the IMF. "There would be much debate about the unpopular decision of further monetary tightening as there's already pressure from the business side," said Asif Qureshi, head of research at Invisor Securities Ltd. Another interest rate rise could drive some businesses to the wall, said another analyst. "Already reeling from the rate rises in the past few months, businesses have cut back on expansion," said Asad Iqbal, managing director at Ismail Iqbal Securities Ltd. "With the IMF looking to contract the economy to stabilise the balance of payments, businesses are likely to buckle due to increased financing costs." But CitiBank's Khan said an interest rate rise was needed to put off government borrowing from the central bank. "A certain increase in interest rates, unfortunately, is required and for a very specific reason, that government borrowing from the banking system has been very high and most of the borrowing comes from the central bank," said Khan. "This needs to be reversed." Pakistan's economic woes began before the global financial crisis set in, but analysts say the crisis has compounded Islamabad's difficulties by making donors reluctant to step in. The country needs short-term help to fill a financing gap of between $3.5 billion and $4.5 billion, and $10 billion to $15 billion to cover a current account financing gap and undertake adjustments over the next two years. Email Story IM Story Printable View Blog This Recommend this article Average (0 votes) Sign in to recommend this article » Most Recommended Stories » Related Articles: Business TOPWRAP 8-China cuts rates, Fed and others set to followReuters - Thursday, October 30 Japan's Sumitomo Mitsui expands despite crisisAFP - 1 hour 23 minutes ago Japan's Softbank operating profit hits record high with iPhone helpAFP - 1 hour 26 minutes ago Comcast 3Q profit rises 38 pct, co. boosts outlookAP - 1 hour 26 minutes ago P&G says 1Q profit rises 9 percentAP - 1 hour 27 minutes ago Most Popular – Business Viewed When men see red, they see hot: study World's fattest man weds friend's widow Desperate pleas end in despair as starlet's nephew found dead Obama set for prime-time appeal to voters Markets rebound ahead of key US meeting View Complete List » Search: Home Singapore Asia Pacific World Business Entertainment Sports Technology

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