Inflation in Pakistan jumps to 25%; close to 30-year high

Inflation in Pakistan jumps to 25%; close to 30-year high
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First Published: Mon, Nov 10 2008. 11 52 PM IST
Updated: Mon, Nov 10 2008. 11 52 PM IST
Karachi: Pakistan’s inflation accelerated to near a three decade high in October, placing further strains on a nation that the International Monetary Fund (IMF) says needs $10 billion (Rs47,300 crore) to avoid defaulting on its debt.
Consumer prices in the country soared 25% from a year earlier after gaining 23.9% in September, the Federal Bureau of Statistics said in Islamabad on Monday. Pakistan may have to raise interest rates to receive a bailout, if IMF insists on the same conditions it applied to loans for Iceland and Ukraine. Higher borrowing costs may not bring inflation down soon as other conditions attached to an IMF loan would likely include higher energy prices, economists said.
“The time when inflation actually starts to recede may be pushed forward further,” said Khalid Iqbal Siddiqui, head of research at InvestCapital Securities in Karachi. “Even though fuel prices are currently on the way down, there are other utilities whose prices are likely to be raised by the government, as per an agreement with the IMF.”
State Bank of Pakistan governor Shamshad Akhtar is struggling to bring inflation under control amid a blowout in the nation’s balance of payments and a 31% drop in the rupee this year, which has driven up import costs. The domestic currency reached a record low of 83.55 per dollar on 17 October.
The nation’s foreign exchange reserves have also shrunk to $3.71 billion on 25 October from $14.2 billion a year ago, raising concern that Pakistan will not be able to pay its $3 billion debt servicing costs due in the coming year.
Petrol prices in Pakistan were cut by 6% on 1 November, the seventh change in eight months, after a decline in crude oil prices in the international market.
Pakistan is expected to make a formal request for assistance to IMF this week, Business Recorder newspaper reported on Monday, without elaborating on where it obtained the information.
Conditions attached to an IMF loan would include an increase in the central bank’s benchmark interest rate to 15% from 13%, as well as a 31% rise in tariffs on electricity and other utilities, the newspaper reported.
Pakistan is also seeking funds from lenders such as the World Bank and the Asian Development Bank and donor countries included in the “Friends of Pakistan” group to help stabilize its economy. A meeting of the group, which includes the US, the UK, China and Saudi Arabia, is scheduled for this month in the United Arab Emirates.
The country’s credit rating was lowered by Standard and Poor’s (S&P) and Moody’s Investors Service in October on concern the nation won’t be able to pay its overseas debt because of eroding foreign reserves. The country ended its last IMF programme in 2004.
“Pakistan faces severe pressure from the external side, the fiscal side, the monetary side, economic growth and politics,” Elena Okorotchenko, head of Asian sovereign ratings at S&P, said in a 5 November interview in Singapore. “There are five angles in which we analyse a country’s ratings and Pakistan is negative on all counts.”
Meanwhile, data posted on the website of the Federal Bureau of Statistics showed the country’s trade deficit narrowed by 2.9% in October as exports rose faster than imports. The trade gap fell to $1.9 billion in the fourth month of the fiscal year that started on 1 July, from $2 billion a year ago.
Overseas sales climbed 10.2% to $1.52 billion, while imports surged 2.5% to $3.5 billion, according to the data.
The trade gap in the first four months ended 31 October widened 33.3% to $7.5 billion, from $5.6 billion a year ago.
Exports in the four months rose 16.6% to $6.7 billion and imports climbed 24.8% to $14.3 billion.
Patricia Lui in Singapore contributed to this story.
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First Published: Mon, Nov 10 2008. 11 52 PM IST
More Topics: Inflation | Pakistan | IMF | Petrol | Crude Oil |