Clock ticks down on Pakistan’s payment crisis

Balance of payments worsening day by day

Pakistan banking on Beijing, Washington, Gulf financial support

ISLAMABAD: Pakistan moved closer to a balance of payments crisis on Friday, as the rupee slumped to a record low after the central bank reported it had barely enough foreign currency to cover six weeks of imports.

Militants, seeking to destablise a nuclear-armed US ally, stand to gain most from an economic meltdown in Pakistan. A six-month-old civilian government, headed by President Asif Ali Zardari, is banking on international support for Pakistan’s transition to democracy after more than eight years under former army chief Pervez Musharraf.

Pakistani officials have been to Beijing, Washington, and the Gulf to whip up financial support, but there have been no firm commitments.

As of Oct 11, Pakistan’s foreign currency reserves totalled $7.75 billion, having fallen $570 million in a week. Critically, the central bank’s share of this has fallen to $4.34 billion, while commercial banks held $3.41 billion.

As a result of deteriorating external balances and dwindling reserves the rupee fell almost 2.8 percent on Friday to a record low of 84.40, having lost 27 percent since the start of 2008. There have been uncorroborated reports in the media that Pakistan’s reserves are in a more parlous state. On Friday central bank reserves had slid to just under $4 billion as of Oct 16 and out of that $1.5 billion had been consumed by currency forward booking liabilities.

A source with knowledge of the external position said a big capital infusion was needed in the next one to one-and-a-half months: “Otherwise there will be a serious problem.”

The data shows the central bank has barely enough foreign currency to cover six weeks of imports. Including commercial bank reserves, it has two months’ cover.

Up to $4 billion is needed urgently, according to Sakib Sherani, a bank economist on the prime minister’s economic advisory council. Pakistan needs $7 billion to cover a projected current account deficit of $14 billion for the fiscal year to June.

The international bond market has already priced in a default on a $500 million bond due to mature in February. Economists say Pakistan is shedding reserves at a rate of about $1 billion a month.

Imports totalled $3.8 billion in September. Exports were $1.78 billion, creating a trade deficit if $2.207 billion. In July-September the current account deficit widened to $3.95 billion from $2.27 billion in the same period a year ago. The main factors behind the widening deficit are soaring oil and food prices, compounded by a poor wheat crop last year.

Shaukat Tarin, a respected banker appointed economic troubleshooter last week, said on Monday he was sure Pakistan would fulfill upcoming debt obligations of $3 billion.

The source with knowledge of the external situation was sure Pakistan would not default on the $500 million bond in February. Raise interest rates, while easing banks’ liquidity, impose capital controls, ban imports of non-essentials, and limit how much foreign currency foreigners can buy using rupees.

Inflation at 25 percent is a good reason to raise interest rates, but a rapid slowdown in economic growth limits the scope. Pakistan can also stop foreigners from withdrawing funds. A floor imposed on the stock market in August effectively stopped investors exiting a market that had fallen 35 percent this year. The Karachi Stock Exchange plans to remove the floor on Oct. 27. Investors fear it will probably spark a rush for the door.

Introducing rules to force foreigners to retain proceeds from sales of stocks or bonds in Pakistan for a set period is an option.

The central bank can also buy time by imposing capital controls that would break the link between onshore and offshore players, like ending credit facilities for offshore players.

The government doesn’t want to go through the humiliation of an IMF rescue package. But it has consulted the IMF over policies to reassure other lenders.

The World Bank has $1.4 billion available under an existing programme for Pakistan, but it needs board approval. The Asian Development Bank lent $500 million last month.

The United States officials say privately that Pakistan’s biggest bilateral lender wants it to go to the IMF. The US presidential election complicates prospects of US help in the short-term.

China an old ally granted a $500 million concessional loan in April. Some media reports say Zardari wants another of $1.5 billion or more.

Pakistan said months ago that Saudi Arabia had agreed in principle to deferred payments for oil, but nothing has happened. Other oil exporters have been asked for help.

“Friends of Pakistan” the potential donors, who came together on the sidelines of the U.N. General Assembly last month, are expected to meet in Abu Dhabi in mid-November. Officials say this should not be billed as a pledging forum, but it could help Pakistan generate support.

Agencies, The Post, 18/10/2008

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