ISLAMABAD Oct 6 The risk that Pakistan could
become the bankrupt state it was before a military coup nine
years ago loomed larger on Monday as the rupee struck an
all-time low and its debt was relegated deeper into junk bond
The six-month-old civilian government led by President Asif
Ali Zardari is engulfed with crises left behind by former army
chief General Pervez Musharraf, who resigned as president in
On Monday, amid gloom over an economic morass and a
security threat posed by Islamist militants after Islamabad's
Marriott Hotel was blown up last month, the rupee hit 78.65 per
dollar. That took its loss since the start of the year to more
than 21 percent.
The central bank has just enough foreign currency to cover
two months of imports, and a potential default on a sovereign
loan is looming in February.
The fiscal and current account deficits are unsustainable.
Inflation is over 25 percent and rising.
Rating agency S&P cut the rating on the country's sovereign
debt rating to CCC-plus, a few notches above default level.
S&P said Pakistan's worsening external liquidity may
imperil its ability to meet about $3 billion in upcoming debt
"The Pakistani authorities now need to demonstrate that the
financing gap in the balance of payments is capable of being
bridged," said Tim Condon, economist at ING Bank in Singapore.
Analysts say Pakistan's best hope lies in the goodwill of
multilateral lenders and friendly governments, like the United
States and Saudi Arabia, keen to see the six-month-old civilian
government succeed and stop a nation on the front line of the
global war on terrorism sliding into chaos.
"That's their only lifesaver. The rest is a mess," said a
Singapore-based fixed income fund manager from a major U.S.
asset management firm, who asked not to be named.
The Asian Development Bank finally came through with a $500
million loan last week, but much more was needed.
An adviser to Prime Minister Yousaf Raza Gilani said last
week that $3-4 billion was needed fast to stabilise the
Pakistan's foreign reserves fell $690 million to $8.13
billion in the week that ended on Sept. 27. The State Bank of
Pakistan said its own reserves fell to $4.68 billion,
representing a little over two months of import cover.
The constant pressure to pay import bills and meet debt
payments has drained liquidity, and forced the government to
borrow more from the central bank.
Data released on Monday showed government borrowing was
more than 100 percent up at $2.21 billion -- all of it from the
central bank -- in the first 11 weeks of a fiscal year that
began on July 1, compared with year-ago levels.
Coming back on Monday for the first full day's trading
since the Muslim festival of Eid al-Fitr, Pakistan's illiquid
money markets saw volatile call money rates surge to 40 percent
before settling back below 30 percent.
Pakistani bankers called for urgent central bank action to
stop a liquidity crunch putting banks in jeopardy.
"It should do something immediately, as there is risk for
systematic failure," said a senior banker, who requested
anonymity due to the authorities' sensitivity regarding
management of the markets.
Some bankers said they expected State Bank of of Pakistan
to cut banks' statutory liquidity requirement (SLR) or cash
reserve requirement (CRR) by at least 50 basis points, or
Longer term, bankers said the central bank may need to
raise the discount rate, which was hiked to 13.0 percent in
STOCKS EXIT PLAN
While the currency has slid and the money market dried up,
Pakistan's stock market has been propped up by an artificial
floor placed under the index at the end of August.
Authorities are expected to review on Friday how long to
keep the floor and to consider establishing an exit mechanism
for foreign investors, a senior official told Reuters.
The floor has killed trading volumes, with investors unable
to sell at prices that could attract buyers in a market that
has lost almost 35 percent since the start of the year.
The benchmark 100-share index .KSE ended flat at
9,178.97, less than 34 points above the 9,144 floor.
The imposition of an index floor could result in Pakistan
being removed from the benchmark MSCI emerging equities index.
Remy Briand, the global head of index research at MSCI
Barra MXB.N warned that countries which curb the free flow of
capital were likely to be relegated to the "frontier markets
index", which covers economies with underdeveloped stock
(Additional reporting by Sahar Ahmed in Karachi and Rafael Nam
in Hong Kong)