VZCZCXRO9403
RR RUEHLH RUEHPW
DE RUEHIL #3316/01 2941054
ZNR UUUUU ZZH
R 201054Z OCT 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9355
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3039
RUEHBUL/AMEMBASSY KABUL 9257
RUEHNE/AMEMBASSY NEW DELHI 3894
RUEHLO/AMEMBASSY LONDON 8893
RUEHKP/AMCONSUL KARACHI 0463
RUEHLH/AMCONSUL LAHORE 6203
RUEHPW/AMCONSUL PESHAWAR 5038
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 003316 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PREL PK
SUBJECT: POT OF GOLD CONTINUES TO ELUDE GOP 
 
¶1. (U) Summary:  Per State Bank of Pakistan (SBP) statistics, in the 
first quarter of FY09, Pakistan's current account deficit increased 
by 74 percent year-on-year, mainly due to the rapid increase in the 
trade deficit, while foreign investment dropped by 9.67 percent 
driven by large outflows from the stock exchanges.  Portfolio 
investment experienced a drastic fall of 815.4 percent, however 
foreign direct investment (FDI) saw an increase of 9.5 percent 
despite security problems and economic turmoil.  Effective October 
18, the SBP has cut the cash reserve ratio (CRR) requirement by 
another 200 basis points to 6 percent, cut the statutory liquidity 
requirement (SLR) to zero percent for time deposits of one year or 
more, and fixed the advances to deposit ratio at 70 percent.  The 
CRR will be reduced another 100 basis points, to five percent, on 
November 15.  These measures will collectively provide PKR 270 
billion (USD 3.2 million at 83.20 PKR to USD) of liquidity into the 
banking system.  On October 18, overnight call rates declined to 11 
percent from a peak of 40 percent a week ago, suggesting that a 
serious liquidity crunch may have been averted.  Pakistan is still 
weighing its options for dealing with its current economic problems, 
including the depleting foreign exchange reserves and the 
depreciating exchange rate.  Finance Minister Shaukat Tareen stated 
publicly on national television that Pakistan has 30 days left to 
decide whether it should accept an IMF program.  End summary. 
 
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TRADE DEFICIT WIDENS, FOREIGN INVESTMENT DOWN 
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¶2. (U) Per SBP statistics, in Pakistan's FY09 first quarter, the 
current account deficit widened by 74 percent to 3.9 billion dollars 
driven by the rapidly expanding trade deficit, which in Q1 of FY09 
was up 84 percent year-on-year.  The services deficit dropped by 22 
percent to USD 1.23 billion from USD 1.59 billion last year.  The 
rising current account deficit is a major challenge for economic 
managers and will increase pressure on foreign exchange reserves and 
the exchange rate.  Net foreign investment decreased by 9.67 percent 
to USD 938.21 million versus USD 1.038 billion in the first quarter 
of FY08.  The decrease in foreign investment is led by portfolio 
investment, which nosedived 815.46 percent to USD minus 172.7 
million from USD 24.15 million last fiscal year.  The downward trend 
in the stock market has badly affected foreign investor confidence 
leading to a removal of investments from the equity market.  FDI, 
however, has increased by 9.51 percent to USD 1.11 billion in the 
first quarter from USD 1.01 billion in the last fiscal year. 
 
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FURTHER MEASURES TO EASE LIQUIDITY CRUNCH 
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¶3. (U) The State Bank of Pakistan took further measures to boost 
liquidity in the banking system on October 17.  It slashed the Cash 
Reserve Requirement (CRR) by 200 basis points to 6 percent and 
exempted time deposits of 1 year or more from the SLR.  The 
reductions in CRR and exemption of time deposits from SLR will 
immediately release an aggregate liquidity of over PKR 180 billion 
(USD 2.18 billion) into the financial system and contribute 
significantly in easing the liquidity strain in the market. 
Cumulatively, SBP's current and previous moves will have released 
PKR 270 billion (USD 3.26 billion) into the banking system.  SBP 
Governor Shamshad Akhtar said that these are temporary measures 
aimed at accommodating the extraordinary liquidity requirements of 
the banking system and therefore should not be construed as a change 
in monetary policy.  She further added that Pakistan's banking 
sector is quite resilient and fully capable of withstanding market 
shocks and adverse macro-economic conditions. 
 
¶4. (U) The central bank also has directed banks to reduce the 
maximum advance to deposit ratio to 70 percent for banks, bringing 
it down from its current rate of 80-95 percent.  In order to ensure 
the smooth transition of banks' balance sheets to this requirement, 
SBP has allowed banks until March 31, 2009, to implement the 
measure. 
 
¶5. (U) At an October 18 meeting, Karachi Stock Exchange (KSE) board 
members briefed the SBP Governor about the lack of liquidity in the 
local bourses.  The Governor assured the KSE members that the SBP 
will ensure the provision of liquidity to stock brokers through the 
banking system.   Noting appreciation for her recent announcement 
about the reduced CRR, media reports that KSE members think that the 
 
ISLAMABAD 00003316  002 OF 002 
 
 
decision will provide some relief.  They asked the SBP Governor to 
allow commercial financing using property and securities as 
collaterals.  The KSE members said that they needed enough liquidity 
to be able to face the potentially tense situation that may arise 
after the removal of the trading floor on the KSE on October 27. 
 
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30 DAYS TO DECIDE WHETHER TO ACCEPT AN IMF PROGRAM 
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¶6. (U) On October 18, Advisor to the Prime Minister for Finance and 
de facto Finance Minister Shaukat Tareen held a press conference on 
national television and announced  that Pakistan has only 30 days to 
decide whether it should seek International Monetary Fund support to 
avert a financial crisis or find some other source to support the 
fast depleting foreign exchange reserves.  He said that the 
government has devised three plans to cope with the financial 
crisis.  Plan 'A' relies on inflows from international donors who 
had agreed to increase assistance to Pakistan during his talks with 
them in Washington recently.  Plan 'B' is  based on the outcome of 
the 'Friends of Pakistan' meeting, scheduled for next month.  Plan 
'C' is a backup program, which included seeking IMF support, should 
the first two options fail.  Mr. Tareen did not give any specifics 
for any of these three plans. 
 
PATTERSON