News
Wednesday, May 26, 2010
Economic stability taking hold in Pakistan: IMF* Official says political uncertainty and inflated budget deficit due to war on terror are threats to recovery
ISLAMABAD: The country’s economy is getting back on an even keel after a balance of payments crisis 18 months ago but it remains vulnerable to shocks and a risky market for investors, the IMF’s representative in Islamabad said on Tuesday.
Political uncertainty, chronic insecurity and a budget deficit inflated by spending to tackle a Taliban insurgency are all threats to recovery, but the outlook is far brighter than when the country was on the brink of default in 2008.
“In terms of the economy, stabilisation seems to be taking hold ... progress has been made,” Paul Ross of the International Monetary Fund said in an interview with Reuters.
The government turned to the IMF for an emergency package of loans in November 2008, when inflation was 25 percent, central bank reserves were the equivalent of just one month of imports and the current account deficit had widened to 8.5 percent of gross domestic product for fiscal year 2007-08.
Now, inflation has dropped to 13 percent, reserves are four months of imports and the current account deficit is set to be around 2-3 percent of GDP this fiscal year ending June 30.
Among risky “frontier markets” the country is seen as too long a shot for many investors due to its insecurity, poor governance, corruption and crippling power shortages.
Indeed, foreign direct investment (FDI) has almost halved over the past year, standing at just $1.77 billion in the first 10 months of fiscal 2009/10 fiscal year. In Vietnam, by comparison, the government expects FDI of $10-11 billion in 2010.
However, there has been an upturn in foreign portfolio investment as the economy has improved, with net inflows into the stock market of $508.7 million in the first 10 months compared with an outflow of $392 million in the year-earlier period.
Ross pointed to a narrowing of the spread on Pakistan’s sovereign CDS, used to insure against sovereign debt default, as a signal of returning confidence in the country’s economy.
The 5-year credit default swap spread started to drop steadily at the end of February from levels above 900 basis points.
“The security situation adds to uncertainty, which investors do not like, but if the economic stability deepens further I would expect CDS spreads to come down some more,” Ross said. reuters
Courtesy www.dailytimes.com.pk