Pakistan needs $3-4b to stabilise economy

ISLAMABAD (Agencies) - Pakistan needs a capital infusion of $3-$4 billion 'up front' to stabilise its economy and bolster rapidly dwindling foreign currency reserves, said an economist serving on the Prime Minister's economic advisory council, Khaleej Times reported.

Sakib Sherani said Pakistan faces a total financing gap of $7 billion to cover a projected current account deficit of $14 billion for the fiscal year ending June 20, 2009, but not all the funds were needed immediately.

"Up front we need at least 3 to 4 billion dollars to stablise the economy," said Sherani, who is chief economist at Royal Bank of Scotland in Islamabad.

He described the projected financing gap for the current account as a "ballpark figure", that took into account already expected financing, and foreign direct investment and portfolio flows. "The financing gap could be higher or lower, depending on how world oil prices go and what happens to imports."

There are expectations that multi-lateral lenders and friendly governments will help the six-month-old civilian government avoid defaulting on a sovereign bond maturing in February, though the market has priced in the risk.

Analysts say Pakistan hopes to bridge the financing gap with a Saudi oil facility, around $2.5 billion from multilateral lenders and $1.5 billion in U.S. aid.

A suicide truck bomb attack on the Marriott Hotel in Islamabad that killed 55 people on Sept 20 has heightened concerns of foreign investors in Pakistan.

Foreign direct investment (FDI) has been concentrated in telecommunications, oil and gas, and banking.

Farhan Rizvi, senior analyst at JS Global Capital Ltd in Karachi, said he expected FDI to to fall to $3-3.5 billion this financial year compared with $5.15 billion in 2007/2008.

The government does not want a support package from the International Monetary Fund, and is devising its own strategy to tackle a widening current account deficit, an unsustainable fiscal deficit, and inflation running at over 25 percent.

Sherani said potential donors have been waiting to evaluate the government's strategy before pledging funds, but the situation was becoming increasingly desperate.

"Now, whether we have a policy framework or not, the donors need to step in and give us the money," Sherani said.

Data showed total foreign currency reserves had fallen to $8.82 billion in the week ending on Sept. 20, down $90 million from the previous week. The central bank's reserves were put at $5.41 billion.

The current account deficit widened to $2.572 billion in July and August which is equivalent to about 1.6 percent of gross domestic product, and compares with a full-year target of 6.0 percent of GDP. The rupee was quoted at 78.05/15 to the dollar at noon on Monday, having dropped more than 21 percent since the start of the year to hit a record low of 78.55 on Sept. 22.

The Karachi Stock Exchange has kept an artificial floor under the main share index to protect share prices that have plunged nearly 35pc this year. Foreign investors have been withdrawing from the market, but had become locked in by the price floor.