IMF sees Pakistan inflation accelerating to 13.5 pct

KARACHI: Inflation in Pakistan is expected to accelerate to 13.5 per cent this year as massive summer floods push up prices for food and other staples, the International Monetary Fund said in its country report.

Prior to the disaster, the IMF had projected average inflation for the current 2010/11 fiscal year at 11.5 per cent, slightly below the 11.7 per cent seen last year.

“The economic outlook has deteriorated sharply as a result of the floods,” the IMF said, adding that gross domestic product (GDP) growth was unlikely to exceed 2.75 per cent this fiscal year.

The government earlier had targeted GDP growth of 4.5 per cent this year, whereas the IMF expected it at 4.25 per cent.

“The agriculture sector — which accounts for 21 per cent of GDP and 45 per cent of employment — has been hit particularly hard,” the IMF said.

“An estimated eight per cent of total cropped area has been flooded, with very significant damage to industrial crops.”

Prime Minister Yousuf Raza Gilani has estimated the damage to crops and infrastructure could hit $43 billion, almost one quarter of last year's GDP.

Inflation was already stubbornly high

The IMF said growth had been picking up before the floods in late July and August, while inflation was stubbornly high.

The central bank raised its key policy rate by 50 basis points to 13 per cent in July prior to the floods. The next monetary policy for the subsequent two months is due to be announced on September 29.

“The SBP (State Bank of Pakistan) is facing a difficult balancing act,” the IMF said.

The government's domestic net financing needs will increase after the floods and about two trillion rupees in treasury bills have to be rolled over this fiscal year, while domestic private demand will soften and undermine the already weak recovery in private sector growth.

“These considerations will have to be weighted carefully in deciding the monetary policy stance,” the IMF said.

Pakistan's inflation accelerated to a four-month high in August as the floods forced food prices higher. The consumer price index rose a higher-than expected 13.23 per cent from a year earlier and was up 2.5 per cent from July.

Earlier, analysts had expected the central bank to wait for the release of a damage assessment report in mid-October before deciding on any policy action, but with inflation stronger than expected, there are fears that the central bank may hike the policy rate soon.

Pakistan received $451 million from the IMF this week to help the country rebuild after the floods.

The IMF has said the money will go toward Pakistan's budget to help with additional spending brought about by the floods and immediate foreign exchange needs.

It is separate from an ongoing $11 billion IMF programme.

The status of the release of the sixth tranche of the bailout loan is unclear, though it has been delayed until at least November.