Pakistan

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S Dec. 9, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Jenny Nordgren. Tel : +46 8 763 9605. E‐mail : jenny.nordgren@seb.se

Country Risk Update
After experiencing several years of high growth, Pakistan is now facing an economic
crisis resulting from expansionary fiscal and monetary policies, surging global
commodity prices and a fragile political situation. This has resulted in slowdown in
growth, worsening macroeconomic balances, huge inflationary pressure and a sharp
decline in international reserves. The high fiscal and current account deficits (7.4 %
and 8.4 % of GDP respectively in 2007/08) and very low international reserves at
USD 3.4 billion as of end-October
2008 (less than one month of imports)
make the economy vulnerable to the
ongoing global financial crisis further
aggravating the economic situation.
This triggered several downgrades by
the rating agencies – S&P to CCC in
November and Moody’s to B3 in end-
October.

To avoid a balance of payment crisis,
the Pakistani authorities turned to the
IMF for financial assistance and other
donors, including the Asian
Development Bank (ADB) and “Friends of Pakistan” (US, Saudi Arabia, China etc.).
The IMF Board concluded on November 24 to give Pakistan a loan of USD 7.6
billion under a 23-month stand-by agreement with immediate access to USD 3.1
billion. Hopes are that the IMF-program – focusing both on restoring macroeconomic
stability and ensuring social stability – will trigger additional financial support from
the donor community. Yet, the program envisages a significant tightening of fiscal
and monetary policies to adjust the large macroeconomic imbalances and strengthen
international reserves. The program will be subject to quarterly reviews – the first
taking place end-march 2009 – on the basis of targets set out in the program
including a reduction of the fiscal deficit to 4.2 % in 2008/09 by primarily phasing
out energy subsidies until June 2009 and rebuild international reserves to USD 8.6
billion 2008/09.
Exchange rate
Source: Reuters EcoWin
2002 2003 2004 2005 2006 2007 2008
U
S
D
/
P
K
R
55
60
65
70
75
80
85

The concluded IMF-program, including the first IMF disbursement of USD 3.1
billion, helped strengthen the reserve position to USD 5.9 billion end of November
reducing the risk of near-term default. However, the ability to implement necessary
measures to attain the remaining IMF disbursements could prove challenging in view
of the fragile political situation and the risk of popular discontent. In addition,
Pakistan faces political and security event risk related to the conflict with India and,
according to some analysts, even “balkanization” as a worst case scenario.
SEB Merchant Banking Country Risk Analysis Dec. 9, 2008

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