Pakistan given inflation warning

One third of Pakistan's population lives in poverty

Financial institutions have warned that Pakistan's high rate of inflation may eat into the country's "robust" economic growth.

Inflation was at its highest since 1997, International Monetary Fund (IMF) officials said. State bank figures show inflation could hit 8.8% next year.

The warning comes after a similar caution by the Asian Development Bank.

Pakistan has been pursuing aggressive economic reforms since Gen Pervez Musharraf seized power in a 1999 coup.

Higher price and wage pressures... could eventually hurt Pakistan's competitiveness IMF regional director Mohsin S Khan

IMF officials said the country's gross domestic product could grow by 7.5% in the financial year ending June 2005.

But Pakistan also needed to reduce poverty and tackle inflation, they said.

"Rapid import and credit growth and rising core inflation indicate that the economy continues to heat up," IMF regional director Mohsin S Khan said.

"Higher price and wage pressures, combined with limited exchange rate flexibility, as witnessed since the beginning of the year, could eventually hurt Pakistan's competitiveness," he said.

Mr Khan was speaking in Islamabad at the start of a two-day annual conference of Pakistan's international donors and lenders.

'Run faster'

Pakistan Prime Minister Shaukat Aziz told the conference his country was committed to economic reforms and called on donors for more help.

We need to catch up with the rest of the world Prime Minister Shaukat Aziz

"The gap between the developed and the developing, between the rich and the poor, is increasing every day," he said.

According to official estimates, about 30% of Pakistan's 155 million people live below the poverty line.

"We need to catch up with the rest of the world. To catch up we need to run faster than the runners ahead of us," Mr Aziz added.

But aid donors and lenders are not expected to make fresh pledges at this week's meeting, reports Reuters news agency.

In keeping with the IMF's advice for tighter monetary controls, Pakistan's central bank raised interest rates last week by 1.5%.

Bankers and analysts described it as an aggressive move, but one that was needed to control inflation.

The interest rate hike followed a warning last Friday from the Asian Development Bank in its Pakistan Economic Update (July 2004 - March 2005) that "the rising inflation can undermine the stability of exchange rate, distort incentives structure and eventually stall growth".

Despite the warnings, international institutions say key economic indicators - including Pakistan's relations with neighbouring India - were looking good.