IMF sees Pakistan inflation accelerating

KARACHI : Inflation in Pakistan is expected to accelerate to 13.5 percent 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 percent, slightly below the 11.7 percent 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 percent this fiscal year.The government earlier had targeted GDP growth of 4.5 percent this year, whereas the IMF expected it at 4.25 percent. The agriculture sector -- which accounts for 21 percent of GDP and 45 percent of employment -- has been hit particularly hard, the IMF said. An estimated 8percent of total cropped area has been flooded, with very significant damage to industrial crops.Prime MinisterYousuf 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 HIGHThe IMF said growth had been picking up before the floods in late July and August, while inflation was stubbornly high. The State Bank of Pakistan (SBP) raised its key policy rate by 50 basis points to 13 percent in July prior to the floods. The next monetary policy for the subsequent two months is due to be announced on Sept. 29. The SBP is facing a difficult balancing act, the IMF said.The government s domestic net financing needs will increase after the floods and about 2 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 percent from a year earlier and was up 2.5 percent from July.Earlier, analysts had expected the SBP 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 SBP may hike the policy rate soon.

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