Economists back rate rise

Investors fled Pakistan''s stock market on Monday after last week''s sharp increase in interest rates, but economists praised the central bank''s decisive action to counter inflation.
The State Bank of Pakistan (SBP) raised its discount rate to 12.0 percent from 10.5 percent on Thursday to help control ballooning fiscal and current account deficits and rein in inflation, which hit 17.2 percent in April, a level last seen in the mid-1970s.
"It is one of the few central banks in the region prepared to actively confront head-on the current macroeconomic issues of inflation and excessive aggregate demand," said Matthew Wilson, a research analyst at Morgan Stanley.
The stock market, which has hitherto largely ignored Pakistan''s deteriorating macroeconomic situation, went into an accelerated decline. On Monday the KSE 100-share index ended at 12,584.75 points, down from a close of 13,011.74 on Friday. It has lost nearly 8 percent in the two trading sessions since the rate hike was announced.
"Sentiment was weak already on economic and political uncertainty," said Shuja Rizvi, director broking operations at Capital One Equities Ltd. "The moves by the SBP, though necessary, made weak holders offload their holdings and the rest remained sidelined."
Analysts said monetary tightening will certainly have a negative effect on corporate sector earnings, and banks will be hit by the imposition of a minimum 5 percent deposit rate to be paid to customers with interest-bearing checking accounts. The KSE index is now 20 percent below an all-time high of 15,700.48 hit in mid April, having already been weakened by fear of political instability after PML-N, a coalition partner, withdrew its ministers from cabinet two weeks ago.
Like other oil importing developing countries Pakistan has been hit by soaring global oil and commodity prices, and a shortage of basic foodstuffs added to the problems. Pakistan''s responses to these challenges have been hampered by political uncertainties going back to early 2007.
Failure to trim food and fuel subsidies have exacerbated spending overshoots, while revenue collection has lagged. "The central bank used whatever it could in its domain," said Asif Qureshi, head of research at Invisor Securities Ltd. "What is needed now is fiscal responsibility."