Pakistan's central bank tries to quell default rumours

Sep 4, 2008, 11:40 GMT

Karachi - Pakistan's central bank on Thursday said it was working closely with the government to restore economic stability amid rising rumours that the country might default soon on loans from its international creditors.

'The federal government and the central bank are working in tandem to restore macroeconomic stability,' Shamshad Akhter, the governor of State Bank of Pakistan, said in an unscheduled statement.

Akhter blamed the prolonged political instability and rising international fuel and commodities prices for the country's financial difficulties.

Pakistan has around 45 billion US dollars in foreign debts, including around 16 billion of bilateral and market loans, which are rumoured to be facing the biggest risk of default.

On the London Stock Exchange, the country's sovereign debt has become the riskiest in the world, surpassing Argentina. Here the insurance premiums for Pakistani debt, called Credit Default Swaps (CDS), have skyrocketed to 950,000 dollars for each 10-million-dollar loan against 788,000 dollars for Argentina.

'This shows the international investors are already contemplating a default-like scenario,' Mohammad Sabir, economist at the Social Policy Development Centre told Deutsche Presses-Agentur dpa.

Meanwhile, Akhter said the government had decided to selectively sell its assets to meet 'the financing gap.'

The governor also said negotiations were going on a fast-track basis with multilateral financial agencies to secure financing, including 500 million dollars from the Asian Development Bank and 1 billion dollars from the World Bank.

In a separate development, the central bank on Thursday also revealed new foreign exchange reserve figures, depicting a further loss of over 200 million dollars from last week to 9.1 billion dollars.

But analysts say the situation was far more alarming, saying actual reserves are at a dangerously low 4 billion dollars, barely enough to sustain one month of imports.

They accuse the central bank of providing a wrong picture by showing around 3.3 billion dollars of private foreign currency deposits as part of its hard currency reserves.

Analysts also said an additional 1.5 billion dollars have already been booked by importers for covering imports for September and October.

'This leaves hardly 4 billion dollars in actual reserves, or just one month of imports,' said an analyst at a foreign bank.

Last time Pakistan faced a similar situation was in late 1999 when an emergency debt payment rescheduling through the International Monetary Fund (IMF) stabilization programme saved the country from bankruptcy.

Later, billions of dollars of anti-terrorism aid after the September 11, 2001 attacks in United States boosted both the economy and reserves.