POT OF GOLD CONTINUES TO ELUDE GOP

UNCLAS SECTION 01 OF 02 ISLAMABAD 003316 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PREL PK SUBJECT: POT OF GOLD CONTINUES TO ELUDE GOP ¶1. (U) Summary: Per State Bank of Pakistan (SBP) statistics, in the first quarter of FY09, Pakistan's current account deficit increased by 74 percent year-on-year, mainly due to the rapid increase in the trade deficit, while foreign investment dropped by 9.67 percent driven by large outflows from the stock exchanges. Portfolio investment experienced a drastic fall of 815.4 percent, however foreign direct investment (FDI) saw an increase of 9.5 percent despite security problems and economic turmoil. Effective October 18, the SBP has cut the cash reserve ratio (CRR) requirement by another 200 basis points to 6 percent, cut the statutory liquidity requirement (SLR) to zero percent for time deposits of one year or more, and fixed the advances to deposit ratio at 70 percent. The CRR will be reduced another 100 basis points, to five percent, on November 15. These measures will collectively provide PKR 270 billion (USD 3.2 million at 83.20 PKR to USD) of liquidity into the banking system. On October 18, overnight call rates declined to 11 percent from a peak of 40 percent a week ago, suggesting that a serious liquidity crunch may have been averted. Pakistan is still weighing its options for dealing with its current economic problems, including the depleting foreign exchange reserves and the depreciating exchange rate. Finance Minister Shaukat Tareen stated publicly on national television that Pakistan has 30 days left to decide whether it should accept an IMF program. End summary. - - - - - - - - - - - - - - - - - - - - - - - TRADE DEFICIT WIDENS, FOREIGN INVESTMENT DOWN - - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) Per SBP statistics, in Pakistan's FY09 first quarter, the current account deficit widened by 74 percent to 3.9 billion dollars driven by the rapidly expanding trade deficit, which in Q1 of FY09 was up 84 percent year-on-year. The services deficit dropped by 22 percent to USD 1.23 billion from USD 1.59 billion last year. The rising current account deficit is a major challenge for economic managers and will increase pressure on foreign exchange reserves and the exchange rate. Net foreign investment decreased by 9.67 percent to USD 938.21 million versus USD 1.038 billion in the first quarter of FY08. The decrease in foreign investment is led by portfolio investment, which nosedived 815.46 percent to USD minus 172.7 million from USD 24.15 million last fiscal year. The downward trend in the stock market has badly affected foreign investor confidence leading to a removal of investments from the equity market. FDI, however, has increased by 9.51 percent to USD 1.11 billion in the first quarter from USD 1.01 billion in the last fiscal year. - - - - - - - - - - - - - - - - - - - - - FURTHER MEASURES TO EASE LIQUIDITY CRUNCH - - - - - - - - - - - - - - - - - - - - - ¶3. (U) The State Bank of Pakistan took further measures to boost liquidity in the banking system on October 17. It slashed the Cash Reserve Requirement (CRR) by 200 basis points to 6 percent and exempted time deposits of 1 year or more from the SLR. The reductions in CRR and exemption of time deposits from SLR will immediately release an aggregate liquidity of over PKR 180 billion (USD 2.18 billion) into the financial system and contribute significantly in easing the liquidity strain in the market. Cumulatively, SBP's current and previous moves will have released PKR 270 billion (USD 3.26 billion) into the banking system. SBP Governor Shamshad Akhtar said that these are temporary measures aimed at accommodating the extraordinary liquidity requirements of the banking system and therefore should not be construed as a change in monetary policy. She further added that Pakistan's banking sector is quite resilient and fully capable of withstanding market shocks and adverse macro-economic conditions. ¶4. (U) The central bank also has directed banks to reduce the maximum advance to deposit ratio to 70 percent for banks, bringing it down from its current rate of 80-95 percent. In order to ensure the smooth transition of banks' balance sheets to this requirement, SBP has allowed banks until March 31, 2009, to implement the measure. ¶5. (U) At an October 18 meeting, Karachi Stock Exchange (KSE) board members briefed the SBP Governor about the lack of liquidity in the local bourses. The Governor assured the KSE members that the SBP will ensure the provision of liquidity to stock brokers through the banking system. Noting appreciation for her recent announcement about the reduced CRR, media reports that KSE members think that the ISLAMABAD 00003316 002 OF 002 decision will provide some relief. They asked the SBP Governor to allow commercial financing using property and securities as collaterals. The KSE members said that they needed enough liquidity to be able to face the potentially tense situation that may arise after the removal of the trading floor on the KSE on October 27. - - - - - - - - - - - - - - - - - - - - - - - - - - 30 DAYS TO DECIDE WHETHER TO ACCEPT AN IMF PROGRAM - - - - - - - - - - - - - - - - - - - - - - - - - - ¶6. (U) On October 18, Advisor to the Prime Minister for Finance and de facto Finance Minister Shaukat Tareen held a press conference on national television and announced that Pakistan has only 30 days to decide whether it should seek International Monetary Fund support to avert a financial crisis or find some other source to support the fast depleting foreign exchange reserves. He said that the government has devised three plans to cope with the financial crisis. Plan 'A' relies on inflows from international donors who had agreed to increase assistance to Pakistan during his talks with them in Washington recently. Plan 'B' is based on the outcome of the 'Friends of Pakistan' meeting, scheduled for next month. Plan 'C' is a backup program, which included seeking IMF support, should the first two options fail. Mr. Tareen did not give any specifics for any of these three plans. PATTERSON