VZCZCXRO5192
RR RUEHLH RUEHPW
DE RUEHIL #3264/01 2881223
ZNR UUUUU ZZH
R 141223Z OCT 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9273
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3022
RUEHBUL/AMEMBASSY KABUL 9248
RUEHNE/AMEMBASSY NEW DELHI 3884
RUEHLO/AMEMBASSY LONDON 8870
RUEHKP/AMCONSUL KARACHI 0451
RUEHLH/AMCONSUL LAHORE 6191
RUEHPW/AMCONSUL PESHAWAR 5025
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 02 ISLAMABAD 003264 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PREL PK
SUBJECT: FOREIGN RESERVES CONTINUE TO FALL AND LACK OF LIQUIDITY 
SQUEEZES MARKETS 
 
¶1. (SBU) Summary:  Pakistan's foreign exchange reserves fell to USD 
4.3 billion on October 10 and the GOP has decided to reduce 
petroleum reserves to 10 days instead of 21 days in hopes of 
reducing the outflow of dollars. Pakistan's stock markets and 
inter-bank market continue to experience liquidity shortages.  The 
State Bank of Pakistan (SBP) took various measures to ease liquidity 
in the inter-bank market, including raising the limits for using 
Pakistan Investment Bonds and Treasury Bills to meet the statutory 
liquidity requirement and allowing the use of investment in Pakistan 
Investment Bonds and Treasury Bills for borrowing from the State 
Bank of Pakistan under its discount window. Pakistan's stock 
exchanges are suffering a liquidity crunch in the continuous funding 
system (CFS) which lends money for equity investment.  The financial 
institutions' reluctance to provide funds in the CFS market has 
further aggravated the situation.  In a meeting on October 13 the 
financial institutions assured Securities Exchange Commission 
Pakistan (SECP) and Karachi Stock Exchange (KSE) they would provide 
funds in the CFS market, although there was no agreement on concrete 
measures.  End Summary. 
 
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FOREIGN EXCHANGE RESERVES 
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¶2. (SBU) Foreign exchange reserves have again dipped to USD 4.33 
billion on October 10, 2008 reflecting a drop of 530 million dollars 
for the week of October 3.  Pakistan's foreign exchange reserves had 
improved marginally to USD 4.86 billion on September 30 after 
disbursement of Asian Development Bank loan of USD 500 million.  The 
rapid depletion of the foreign exchange reserves is attributed to 
debt servicing, import financing and an unusual intervention in the 
inter-bank market on October 9, when the SBP injected USD 100 to 200 
million into the currency market to stop the rapid fall of the 
rupee. 
 
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REDUCTION IN OIL RESERVES TO CONSERVE DOLLARS 
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¶3. (SBU) Secretary G.A. Sabri of the Ministry of Petroleum and 
Natural Resources told EconOff that the government has decided to 
maintain reserves of petroleum products for 10 days instead of 21 
days in order to reduce the outflow of dollars.  He said "the 
decision will bolster the country's foreign exchange reserves." 
 
¶4.  (SBU) For the first two weeks of October, the GOP was paying a 
subsidy of PKR 8.21 per liter on kerosene, PKR 7.41 on light diesel 
oil and PKR 6.42 per liter on high speed diesel; adding up to a 
monthly subsidy of PKR 1.7 billion.  Tahmoor Azmat Osman, Joint 
Secretary Ministry of Petroleum told EconOff that the government has 
to pay over PKR 40 billion to oil marketing companies and refineries 
on account of accumulated price differential claims (i.e. 
subsidies).  Osman said that "the outstanding amount could only be 
paid through earnings from gasoline and diesel in the wake of 
declining crude oil prices in the international market."  (Comment: 
Post is seeking clarification on this acknowledged debt.  Post 
believes that Osman is referring to debt to the independent power 
producers who are currently producing below capacity due to 
non-payment.  U.S. energy companies such as Chevron and AES are owed 
approximately USD 275 million for energy production (Septel).) 
 
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SBP MOVES TO END LIQUIDITY CRUNCH 
- - - - - - - - - - - - - - - - - 
 
¶5.  (SBU) On October 17, the SBP took new measures to alleviate the 
liquidity crunch in the money market. 
As part of their obligation to meet statutory liquidity 
requirements, banks may maintain up to 5 percent of their time and 
demand liabilities (currency deposits with a minimum term before 
withdrawal and those that can be withdrawn at any time, 
respectively) in the form of Pakistan Investment Bonds and Term 
Finance certificates.  Effective October 18, the SBP has decided to 
increase this limit to 10 percent.  The additional 5 percent 
increase can only be met through investment in Pakistan Investment 
Bonds.  The SBP has also decided to immediately allow the use of 
market treasury bills and Pakistan Investment Bonds for borrowing 
under the SBP discount window, to the extent investment in these 
 
ISLAMABAD 00003264  002 OF 002 
 
 
securities is in excess of the limit prescribed for statutory 
liquidity requirements. 
 
¶6.  (SBU) This is the central bank's second move to increase 
liquidity in the money market within the last seven days.  Earlier, 
during the week of October 6-10, the SBP announced a relaxation in 
the cash reserve requirement and reduced it by 2 percent, from 9 
percent to 7 percent.  In spite of this, the market was still 
experiencing a liquidity shortage, compelling banks to acquire money 
on higher overnight call rates.  Last week the overnight rates shot 
up to highs of 35-40 percent. 
 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
FINANCIAL INSTITUTIONS AGREE TO KEEP CFS MARKET FLUID 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶7. (SBU) Securities and Exchange Commission of Pakistan (SECP) 
chairman, Razi-ur-Rehman, said that after a marathon meeting of the 
SECP and KSE with banks and mutual funds on October 13, the 
regulators had managed to persuade institutional investors not to 
withdraw committed funds from the CFS market in order to prevent 
depletion of market liquidity and endangerment of the financial 
system.  (Comment: the CFS market functions similarly to lending on 
the margin in the U.S.  End Comment.) 
 
¶8. (SBU) The stock markets' troubles were exacerbated on October 10, 
following the financiers' decision to halt the flow of new funds 
into the CFS because of the perception of rising risk.  After 
discussions, the banks and mutual funds gave an assurance that they 
would carry on with their current commitments in the CFS market and 
not withdraw funds.  According to KSE Board member Junaid Mirza 
there was still a question mark as to whether the committed funds 
would arrive in the market as the financial institutions had not 
agreed to any concrete measures. 
 
¶9.  (SBU) The National Investment Trust, Pakistan's largest mutual 
fund with PKR 80 billion under management, has begun to set up a new 
PKR 20 billion fund for equity investment called the "Pakistan State 
Enterprise Fund."  Media sources report that the government wanted 
the fund to be ready for investment in equity markets by October 27, 
when the KSE floor on shares prices is likely to be lifted.  Mr. 
Shaukat Tareen, Adviser to the Prime Minister on Finance, had 
earlier expressed his disapproval of the KSE floor which has frozen 
the stock market at the level of 9,144 points since August 27. 
 
FEIERSTEIN