As if consumer prices were not enough....

Will Pakistan’ Central Bank keep borrowing costs unchanged, maintaining one of the world’s highest benchmark interest rates, in an economy pummeled by inflation, terrorism and falling foreign investment? But this may not happen unless inflation rate goes down. Inflation accelerated to a three-month high of 13.26 percent in April, according to the Federal Bureau of Statistics. Prices rose after Pakistan raised domestic gas prices by as much as 5.4 percent on April 1.

Highest Rate

Pakistan’s discount rate is the highest among the benchmark interest rates of 53 central banks tracked by Bloomberg. Lebanon’s repurchase rate is the second-highest at 12 percent, the data show.

Constrained by high borrowing costs, Pakistan is seeking aid from The Friends of Democratic Pakistan, a group of donors that includes the U.S., U.K., Japan and Saudi Arabia, to revive an economy that grew 2 percent in the year ended June 30, the least since 2001.

Delays in the release of a $5.3 billion grant pledged by the group in April 2009 have forced the government to tap funds from the central bank, stoking inflation. Government borrowings from the State Bank of Pakistan rose 14.5 percent to 365.9 billion rupees ($4.3 billion) in the 10 months to April from a year earlier, according to the central bank.

Consumer Prices

Increase in consumer prices may increase interest payments at major export industries, whose financial costs have already doubled in the two years to June 2009. Higher borrowing costs could undermine Pakistan’s $168 billion economy even as India, from which it was partitioned in 1947 following independence from British rule, grows at the fastest pace after China among the world’s major economies. India’s $1.2 trillion economy may expand about 8.5 percent in the year to March 31s.

Stocks, Currency

Pakistan’s Karachi Stock Exchange 100 Index fell 0.9 percent to 6,959.28 as of 10:45 a.m. local time, bringing the declines this month to 4.6 percent. The rupee lost 0.6 percent against the U.S. dollar since May 1 and traded at 84.54 today. The yield on the six-month Treasury bill was 12.09 percent in the auction on May 19, compared with 12.14 percent in the previous auction on May 6.

The South Asian economy needs to grow at an average annual pace of 6 percent to reduce poverty, according to the government.

Foreign direct investment in Pakistan dropped 53 percent to $1.32 billion in the first eight months of the fiscal year that started July 1, central bank data showed, as militants retaliated to the Pakistan army’s offensive against Taliban fighters in the country’s northwestern region.

Pakistan received a $7.6 billion loan from the International Monetary Fund in 2008 to avoid defaulting on its overseas debt. The credit agreement was increased to $11.3 billion last year.

Pakistan may turn to the IMF for a second loan to make up for a shortage of money with the government, the nation’s Finance Adviser Abdul Hafeez Shaikh said May 12.   [Courtesy: Businessweek]