InfoAnda - Q+A-Pakistan weighs options as payments crisis looms

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Navigation Primary Navigation Home Singapore Asia Pacific World Business Entertainment Sports Technology Secondary Navigation Singapore Asia Pacific World Search Search: Q+A-Pakistan weighs options as payments crisis looms Reuters - Wednesday, November 5 KARACHI, Nov 4 - Pakistani President Asif Ali Zardari and adviser to the prime minister on economic affairs Shaukat Tarin are in Saudi Arabia on a two-day trip hoping for economic help, including a facility to defer oil payments. Pakistan has a few weeks to raise billions of dollars in foreign loans to keep meeting debt payments and pay for imports and is hoping for help from friendly governments, such as Saudi Arabia, though it says an IMF loan would be a last option. Tarin said last month Pakistan needed $10-15 billion to avoid a balance of payments crisis and make adjustments to right the economy over the next two years. The government has been seeking International Monetary Fund endorsement of its economic strategy, and appears poised to ask the IMF for a loan. Other donors could follow suit. The international community can ill afford economic chaos in a nuclear-armed, front-line state in the war on terrorism. The seven-month-old government, headed by President Asif Ali Zardari, marks a return to civilian-led democracy after more than eight years under former army chief Pervez Musharraf. HOW MUCH FOREIGN CURRENCY DOES PAKISTAN HAVE? As of Oct. 25, Pakistan had $6.92 billion of foreign currency reserves, of which the central bank held $3.71 billion, not enough to cover September's imports totalling $3.807 billion. The rupee hit at an all-time low of 84.40 per dollar on Oct. 17, about 27 percent weaker than at the beginning of the year but it has recovered slightly, to 81.35/45 on Tuesday. The international bond market has already priced in a default on a $500 million bond due to mature in February. Pakistani officials say it won't come to that. HOW MUCH MONEY DOES PAKISTAN NEED TO STAY AFLOAT? The IMF estimates the financing gap on Pakistan's balance of payments at up to $4.5 billion, compared with the government's estimate of $3.0 billion for the fiscal year ending on June 30 next year. HOW MUCH IS PAKISTAN SPENDING? Economists say Pakistan is shedding reserves at a rate of about $1 billion a month. The September trade deficit was $2.207 billion. In July-September, the current account deficit widened to $3.95 billion from $2.27 billion the previous year. The main factors behind the widening deficit are soaring oil and food prices, compounded by a poor wheat crop last year. Falls in the oil price should help reduce the deficits. HOW CAN PAKISTAN HELP ITSELF? The rupee's depreciation will go a long way to inducing overdue adjustments in the economy. The central bank could raise interest rates, impose capital controls, ban imports of non-essentials, limit dollar purchases by foreigners in Pakistan. 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 once a fund is in place. Investors fear it will spark a rush for the door. Bringing in rules to make foreigners keep 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. WHAT CAN PAKISTAN DO TO FIX ITS BUDGET? Stop the government borrowing from the central bank. Cut current, development and defence spending. Zardari may face objections from the powerful army as it battles militants across the northwest, and tries to match Indian military power. Broaden the tax base. At 10.5 percent, Pakistan's tax as a percentage of GDP is one of the world's lowest. Raise taxes on agriculture, a move long resisted by the landed aristocracy, and raise taxes on services, including real estate and stock market transactions. Tarin said last week he hopes to increase the tax to GDP ratio to 15 percent. WHERE COULD HELP ARRIVE FROM? The global economic crisis clouds prospects for help. Tarin has said Pakistan would finalise talks with the IMF by Nov. 10 and its board was likely to take up Pakistan's case for approval for a bail-out package. The World Bank has $1.4 billion available under an existing programme for Pakistan, but it needs board approval. The Asian Development Bank, the Islamic Development Bank, and Britain's development agency would also help, Tarin says. Pakistan imports about 82 percent of its crude oil from Saudi Arabia and analysts said deferred payments on a third of that, as requested, would provide relief of up to $1.8 billion a year on its balance of payments, at current oil prices. "Friends of Pakistan": These potential donors, including China, are due to meet in Abu Dhabi on Nov. 17. (Reporting by Sahar Ahmed; Editing by Robert Birsel/Tony Austin) Email Story IM Story Printable View Blog This Recommend this article Average (0 votes) Sign in to recommend this article » Most Recommended Stories » Related Articles: Business Japan Hot Stocks-Bridgestone, Fast RetailingReuters - 39 minutes ago SNAPSHOT - Financial Crisis - 0012 GMTReuters - 49 minutes ago South Korean won jumps 3.5 pct vs dollarReuters - 51 minutes ago Seoul shares open higher led by exporters, banksReuters - 51 minutes ago Nikkei opens up 1.2 pct as exporters climbReuters - 52 minutes ago Most Popular – Business Viewed Americans flock to vote in historic elections Foods to prevent disease? DNA tests confirm death of millionaire flyer Steve Fossett Obama's grandmother, family 'rock', dies on election eve Australia anxious as Indonesia prepares to execute Bali bombers View Complete List » Search: Home Singapore Asia Pacific World Business Entertainment Sports Technology

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