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By James Mackenzie
ISLAMABAD, Jan 31 (Reuters) - Pakistan’s central bank raised its key policy rate by 25 basis points to 10.25 percent on Thursday in the face of high fiscal and current account deficits and continuing inflation pressure, governor Tariq Bajwa said.
The move comes as Pakistan, which has opened talks with the International Monetary Fund about a possible bailout, faces a struggle to avoid a balance of payments crisis that has left it with growing debts and foreign exchange reserves sufficient only to cover two months of imports.
“Despite narrowing the current account deficit, it remains high, the fiscal deficit is elevated, core inflation is persistently high,” he told a news conference in Islamabad.
“This situation calls for principled consolidation efforts.”
While headline consumer price inflation has eased in recent months, due mainly to a fall in food and petroleum prices, core inflation reached 8.4 percent in December. Average headline consumer price inflation averaged 6 percent in the first half of the 2019 fiscal year to June.
He said the projected rate of inflation remained unchanged at 6.5-7.5 percent, weighing on overall economic performance.
“Real economic activity has witnessed a marked slowdown in the first half of the year,” Bajwa said, adding that the central bank expected economic growth to slow to around 4 percent in fiscal year 2019 from 5.8 percent in 2018.
Turning to the fiscal deficit, which widened to 1.4 percent of GDP in the first quarter of the fiscal year amid a sharp fall in tax revenues, Bajwa said the government, which this month announced a “mini budget” of measures to stimulate exports, had to do more.
“While there is some good, substantial progress on the current account side, we need to probably do more on the fiscal side,” he said.
Bajwa noted that the current account deficit narrowed by 4.4 percent in the first half of the year to some $8 billion, largely driven by a sharp drop in imports of goods and services as well as growth in overseas remittances.
However, financing the current account deficit remained “challenging” as investment and official inflows were insufficient to completely finance the deficit.
As a result, foreign exchange reserves fell to $7.2 billion by the end of December, a figure which was lifted to $8.2 billion following the deposit of $1 billion from the United Arab Emirates last week.
With another $2 billion due to come from the UAE, credit facilities on oil shipments from Saudi Arabia and the UAE and some commercial loans, Bajwa said the immediate balance of payments crisis that had been facing the government had eased.
“I think that as far as this year’s current account is concerned, the financing needs have more or less been covered,” he said. (Reporting by James Mackenzie; Editing by Alison Williams)