Official: Pakistan to cut interest rates, inflation

Mar 2, 2009, 14:27 GMT

Islamabad - The International Monetary Fund (IMF) has allowed Pakistan to cut interest rates this month or in April as the core inflation comes down, a top finance ministry official said Monday in Islamabad.

The permission was granted during the almost two weeks of talks between the IMF and Pakistani officials that ended in Dubai last week for the review of a 7.6 billion dollars programme approved to save the country from default on external payments.

'Finally, we remained able to convince the IMF for lowering down discount rates keeping in view declining trend in core inflation,' Shaukat Tarin, advisor to prime minister on finance told reporters.

Pakistan, a key western ally in the ongoing war against terror, increased the discount rate by 500 basis points in order to tame inflationary pressures, but the measure also resulted in slowing down the economy.

Core inflation, Tarin said, stands at 19 per cent while the discount rate was in the range of 15 per cent, leaving a gap of four per cent. But he said Pakistan's negotiators succeeded in convincing the IMF to let them lowering the discount rate if inflation began to recede, as it is now doing.

He said the country had envisaged the inflation target for the next fiscal year 2009-2010 at six per cent as compared to 20 per cent for the current fiscal year ending on June 30. Monthly inflation is to be reduced to 10 per cent by June 2009.

Pakistan received the first tranch of 3.1 billion dollars from the IMF in November. It is expecting the release of the second tranche of 840 million dollars after the IMF Executive Board meets by the end of March.

Tarin said that the gross domestic product (GDP) target was revised downward from 3.4 to 2.5 per cent for 2008-09 during talks with the IMF in Dubai, while the GDP growth target was foreseen at 4.0 per cent for 2009-2010.