Pakistan cuts interest rate

This is a piece of news that should provide some food for thought for the Central Bank Governor of Nigeria, Sanusi Lamido Sanusi and the other economic managers of the country.

Pakistan, a poor country like Nigeria, and which is not blessed with oil, has done what Nigeria’s policy economists always rule out as impossible:

Pakistan’s central bank on Friday cut its benchmark interest rate from 12 percent to 10.5 percent as it looks to encourage private sector investment.

The governor of central State Bank of Pakistan, Yaseen Anwar, said the new rate would come into effect on Monday, at the start of the new working week.

The bank had decided to give “relatively higher weight” to private sector credit and investment, given that inflation is projected to rise slightly above the target during the current fiscal year, which runs until June 30, 2013.

He blamed an “unenviable equilibrium of high inflation and low growth” on a protracted energy crisis and “weak fiscal fundamentals”, saying that bolstering the balance of payments depends on foreign financial inflows.

External forecasts for the current fiscal year see the budget deficit rising to about seven percent of GDP, while economists warn the government is running out of ways to fund it and is reluctant to embrace reform with polls looming.

Some see little alternative to a major financial crisis or a return to the IMF, which bailed out Pakistan with an $11.3 billion loan package in 2008 that ended last November after Islamabad rejected strict reform demands.

The last time the central bank slashed its benchmark interest rate by 150 basis points, down to 12 percent, was in October 2011.

Interest rate in Nigeria for business loans is about 25 per cent. How can this drive private sector investment, which the Nigerian economy badly needs?