KARACHI Pakistani authorities will raise interest rates to control inflation and if central bank foreign reserves fall below monthly floors set by the International Monetary (IMF), according to a government letter of intent, reports FReuters.

The IMF approved a loan of $7.6 billion last week to avert a balance of payments crisis and prevent the government defaulting on its international debt obligations.

Inflation running at 25 per cent will be brought down to an average of 13 per cent in the 2009/10 fiscal year and to 6 per cent by the end of the next year, the government said in its letter of intent, posted on the IMF website.

The State Bank of Pakistan (SBP) last month raised the key discount rate by 200 basis points to 15 per cent to protect the foreign reserves position, bring down inflation and to avoid more government borrowing from the central bank.

A further increase in the discount rate will be considered in the next monetary policy review, scheduled for January, the government said, while adding it may be raised before then if central bank foreign reserves fall short of monthly floors.

`The discount rate will be raised earlier if the actual reserves for end-November and end-December 2008 fall short of the programme monthly floors on the SBP`s net foreign assets,` it said.

The central bank`s net foreign asset floor for the end of December has been placed at $1.165 billion.

The IMF approved a loan of $7.6 billion last week to avert a balance of payments crisis and prevent the government defaulting on its international debt obligations.

Pakistan`s total foreign currency reserves stood at $9.4 billion on Nov. 26, reflecting the arrival of the $3.1 billion from the IMF. Reserves had totalled $6.6 billion on Nov. 22.

No break-down was given of the reserves held by the State Bank of Pakistan and those held by commercial banks. Foreign reserve data due out on Thursday is likely to include that.

Pakistan got immediate access to the $3.1 billion under the 23-month facility with the rest to be phased in subject to quarterly review.

Fiscal Side

The fiscal deficit is targetted to decline to 4.2 per cent of gross domestic product in the 2008/09 fiscal year, from 7.4 per cent the previous year, by increasing tax revenue and the elimination of oil and electricity subsidies.

The government has also committed to net zero borrowing from the central bank from Oct. 1 to the end of the fiscal year on June 30.

The government has eliminated all petroleum subsidies and plans to eliminate electricity subsidies by June. Electricity tariffs were raised by an average of 18 per cent on Sept. 5.

In the letter of intent, the government also said a floor on the main stock index imposed in August after sharp falls will be removed after reaching understandings with the IMF.

Stock market trading has dried up since the floor was imposed after a fall of nearly 35 per cent for the year. The Karachi Stock Exchange benchmark 100-share index ended flat at 9,187.10, just 43 points above the floor on Wednesday.

`The timing and terms under which the floor on stock prices will be removed, including any use of public funds to support the stock market, will be decided after reaching understandings with Fund staff,` the government said.