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