Pakistan could tighten more to fight inflation

Pakistan is ready to tighten monetary policy further to fight inflation, a senior finance official said on Wednesday, stressing the authorities' commitment to getting inflation down from a three-decade high above 19 percent.

"Some people argue that further monetary tightening may not be very useful, but the whole problem is that we are not willing to compromise on inflation," said Hina Rabbani Khar, special assistant to the prime minister on finance and economic affairs.

"So if that requires more tightening, yes," she told Reuters in an interview in the Malaysian capital, Kuala Lumpur.

Many analysts believe an interest rate rise is imminent, but she declined comment.

"All I am saying is that there are certain things that you are committed to. And more than cheap money and cheap credit, we are more committed to holding on to inflation."

In May the Pakistani central bank increased its discount rate to 12.0 percent from 10.5 percent to counter inflation and widening fiscal and current account deficits.

It then announced an increase in the cash reserve requirement (CRR) -- the ratio of cash banks must keep in reserve with the central bank -- to 9.0 percent from 8.0 percent of deposits up to one-year maturity.

BALANCE OF PAYMENTS

For the 2007/08 fiscal year that ended on June 30, the government expects its budget deficit to be 7.0 percent of gross domestic product (GDP), while the current account deficit is likely to be between 7.3 percent and 7.8 percent of GDP.

Reflecting this, the rupee is near an all-time low.

"The rupee's problem is a balance of payments problem more than anything else," Khar said.

"We will try our very best to hold the slide," she said, mentioning a tightening of regulations on foreign exchange transactions announced by the State Bank of Pakistan on Tuesday.

The rupee firmed on Wednesday in response to the measures, which included a temporary suspension of forward booking of foreign exchange for imports. It rose 2 percent to 71.40/60 per dollar.

The rupee's close on Tuesday of 72.85/90 to the dollar was its weakest ever. At that level it had fallen 6.6 percent since July 1, the start of Pakistan's fiscal year, and 18.3 percent since Jan. 1, due to the deteriorating economic fundamentals.

Khar blamed the caretaker government that took charge temporarily before general elections in February for most of the trouble.

"Within the caretaker set-up, within just three months, because of the huge oil price bill, the sliding down was immense," she said.

"Whereas your current account deficit was looking OK, your budget deficit was within reach, everything just went haywire."

But she was hopeful that things would improve.

"I see this problem settling down within a year. This year would be a year of stabilisation for the Pakistani economy."