ISLAMABAD: While Pakistan is still desperately trying for $4 to $5 billion cash to stem the tide against its external resources, hopes of assistance from the international community are rising and along with some traditional sectors turning in good performances this could prove a silver lining for Islamabad. Cement, oil and gas, banks, financial and telecoms to name some, according to the recent analysis, are the sectors that are doing well. The banks too have performed profitably during the first nine months — January-September — of calendar year 2008.
Foreign Direct Investment (FDI), though small in terms of actual cash dollars, has also flowed in despite political uncertainty that followed the judicial crisis of March 9, 2007. The unrest has continued even after the Feb. 18, 2008 national elections. Traditionally strong performers — telecoms, oil and gas, electricity, petroleum refining, banking and financial services — attracted FDI inflows. These inflows, during July-September, the first quarter of fiscal 2009, were nine percent more than the amount attracted in the same quarter of fiscal 2008.
As the banks and financial services continue to perform well and show good results, it received the highest amount of FDI — $296 million which is 68 percent more than the amount the sector received in the like quarter of last fiscal. This is despite the fact the banks and the financial sector were hit by the ongoing global financial turmoil and the trouble within Pakistan. These adverse factors included the rush on forex, the fast depreciation of the rupee against the greenback and other hard currencies, and the hurtful downturn in the bourses where share values sank and had to be officially frozen through a lower floor.
Compounding these woes were the prolonged electricity outages shutting down industries for several hours a day, the depleting official forex reserves, and rapidly rising inflation — particularly food inflation. The banks also faced a serious liquidity crunch but it has partly been eased with the help of the State Bank of Pakistan (SBP), the central bank. It happened at a time of high credit demand for commodity financing, particularly the onset of the new cotton crop.
While there is a bit of a cheer on the domestic front and international efforts are being mounted to help Pakistan, Moody’s cut its credit rating by one level to B3 this week as the country faced balance of payments difficulties. Moody’s also warned Islamabad of “further cuts.”
The warning came the same day as Germany promised to help Pakistan negotiate a deal with IMF, and mobilize EU countries to assist Islamabad, including through creation of a special fund.
The fast growing telecoms received $259 million during the first quarter of the current fiscal 2009. However, the inflow was 29 percent smaller than the like quarter of fiscal 2008. But the potential of telecoms, particularly the cellular phones, was brightened still further as China Mobile, already operating in Pakistan, announced plans for a big investment and expansion, that could go as high as $1.6 billion.
Despite the domestic political instability and a financial assistance package still to firm up, analysts are optimistic about FDI prospects. One upbeat analyst projects the FDI inflow of close to $5.0 billion in 2009 fiscal, as was the case in fiscal 2008.
Although the official forex reserves are depleting fast and there is a serious weakness of the external balances, Islamabad is upbeat about an international financial package to assist it. Shaukat Treen, the former Citibank executive and newly appointed adviser on finance to Prime Minister Yousuf Raza Gilani, is working on three alternatives for international assistance. His Plan “A” envisages assistance from multilateral banks and International Financial Institutions (IFIs), including the World Bank, Asian Development Bank, and Jeddah-based Islamic Development Bank. Plan “B” is based on his hope to receive funds from “Friends of Pakistan” (FOP), formed in New York in September. The consortium is to meet in Abu Dhabi in November. If Tarin cannot find $4 to $5 billion fund in quick disbursing cash, he said, he will be forced to adopt Plan “C”- going to the IMF. The latest reports suggest multilateral organizations and FOP will wait for an IMF endorsement of Pakistani plans, rather than making decisions prior to the Fund’s action.
Islamabad was, however, buoyed up this week with Germany joining the international efforts to bail out Pakistan. Germany came forward with its offer to also mobilize EU countries. German Foreign Minister Frank-Walter Steinmeier, wrapping up his talks with government leaders in Islamabad this week, said, “Pakistan urgently needs International Monetary Fund’s loan to avert an economic crisis.”
Germany is helping Pakistan in its negotiations with IMF. Steinmeier also said, “The international community needs to do what is required of it to do.”
“The possibility of setting up a fund to bail out Pakistan has been discussed with government leaders in Islamabad. The matter will, be discussed in details in Friends of Pakistan consortium meeting in Abu Dhabi. We intend to support Pakistan not only in fair weather, but also in stormy weather,” Steinmeier said.
