KARACHI, May 21: Pakistan’s interest rates, after dipping over the past half year, may head up if the government plans for higher spending in next month’s budget. But the reversal would be a welcome rise as it would mean the government is succeeding in its efforts to spur economic activity, economists said.

Pakistan’s economy has picked up pace but risks were slowing significantly on the back of weaker global demand. Treasury-bill yields and commercial lending rates are both very low, and any pickup would be modest in part because of flush liquidity in the money market, the economists said.

A Treasury dealer expects the yield on six-month Treasury bills to jump to between 2.50 per cent and 3 per cent by the end of September from the last cut-off yield of 1.68 per cent, and the yield on one-year government paper to rise to 3.25-3.50 per cent from 2.70 per cent.

Mohammad Sohail, research head at Investcap Securities, said a 50-basis point lending rate rise wouldn’t “have a major implication, but if the rate is higher then it could have a slight impact” on lending activity. In the nine months to March 31, demand for private sector loans more than doubled to Rs102 billion from Rs40 billion a year earlier, according to the State Bank data.

The “torrid pace” of loan growth is the result of falling rates, said Sakeb Sherani, chief economist at ABN Amro Bank in Islamabad. Debt yields and bank rates have been falling since the State Bank cut the discount rate 1.5 percentage points to a record low 7.5 per cent in November.

Although the central bank uses the discount rate — at which banks borrow funds for up to three days — to flag its policy preference, the fall in bill yields has been perceived as too steep. For instance, the one-year paper is now trading at 2.70 per cent, providing plenty of room to adjust upward.

The budget is sure to swell, with development spending on schools, roads and other infrastructure projects set to rise 19 per cent to Rs161 billion. The government will also have to subsidize money-losing state-run power utilities.

Ashfaque Hasan Khan, economic adviser to the finance ministry, said the ministry will be focusing on three key areas — housing and construction, small and medium size enterprises, and agriculture.— Dow Jones Newswires